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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number 1-11887
CANYON RESOURCES CORPORATION
(a Delaware corporation)
84-0800747
(I.R.S. Employer Identification No.)
14142 Denver West Parkway, Suite 250, Golden, Colorado 80401
Registrant's telephone number: (303) 278-8464
Securities registered on The American Stock Exchange
pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act:
Warrants to Purchase Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 45,228,743 shares of the registrant's voting
stock held by non-affiliates on March 1, 1999 was approximately $9,896,049.
At March 1, 1999 there were 46,137,074 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K is incorporated herein by
reference to the registrant's definitive Proxy Statement relating to its 1999
Annual Meeting of Stockholders which will be filed with the Commission within
120 days after the end of the registrant's fiscal year.
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CANYON RESOURCES CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
ITEM
NUMBER PAGE
- ------ ----
PART I
1. Business 1
2. Properties 9
3. Legal Proceedings 25
4. Submission of Matters to a Vote of Security Holders 25
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 26
6. Selected Financial Data 27
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
7(a). Quantitative and Qualitative Disclosures about Market Risk 42
8. Financial Statements 44
9. Changes in and Disagreements with Accountants 71
PART III
10. Directors and Executive Officers of the Registrant 71
11. Executive Compensation 71
12. Security Ownership of Certain Beneficial Owners and Management 71
13. Certain Relationships and Related Transactions 71
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 72
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PART I
ITEM 1. BUSINESS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The matters discussed in this report on Form 10-K, when not historical
matters, are forward-looking statements that involve a number of risks and
uncertainties that could cause actual results to differ materially from
projected results. Such factors include, among others, the speculative nature of
mineral exploration, commodity prices, production and reserve estimates,
environmental and governmental regulations, availability of financing, force
majeure events, and other risk factors as described from time to time in the
Company's filings with the Securities and Exchange Commission. Many of these
factors are beyond the Company's ability to control or predict. The Company
disclaims any intent or obligation to update its forward-looking statements,
whether as a result of receiving new information, the occurrence of future
events, or otherwise.
GENERAL
Canyon Resources Corporation, a Delaware corporation (the Company or
Canyon), is a Colorado- based company which was organized in 1979 to explore,
acquire, develop, and mine precious metal and other mineral properties. The
Company or Canyon is used herein to refer to all of the wholly-owned and
majority-owned subsidiaries of Canyon Resources Corporation. (See organizational
chart on next page.) Since 1986 the Company has been a reporting company. Its
securities were traded on NASDAQ until August 16, 1996. On August 19, 1996, the
Company listed its shares for trading on The American Stock Exchange.
The Company is involved in all phases of the mining business from early
stage exploration, exploration drilling, development drilling, feasibility
studies and permitting, through construction, operation and final closure of
mining projects.
Canyon has gold production operations in the western United States, and
conducts exploration activities in the search for additional valuable mineral
properties in the western United States and in a number of areas throughout
Latin America and Africa. The Company's exploration and development efforts
emphasize precious metals (gold and silver). Until December 31, 1998, the
Company also had industrial mineral production operations (diatomite and pumice)
in the western United States. (See "Financing - Asset Sales".)
Once acquired, mineral properties are evaluated by means of geologic
mapping, rock sampling, and geochemical analyses. Properties having favorable
geologic conditions and anomalous geochemical results usually warrant further
exploration by the Company. In almost all cases, exploration or development
drilling is required to further test the mineral potential of a property.
Properties which have a demonstrated inventory of mineralized rock of a
potentially economic nature are further evaluated by conducting various studies
including calculation of tonnage and grade, metallurgical testing, development
of a mine plan, environmental baseline studies and economic feasibility studies.
If economics of a project are favorable, a plan of operations is developed and
submitted to the required governmental agencies for review. Depending on the
magnitude of the proposed project and its expected environmental impact, a
vigorous environmental review may be required prior to issuance of permits for
the construction of a mining operation.
The organizational chart on the following page reflects the Company's
legal ownership of subsidiaries and ownership interests in various gold
properties as of 12/31/98.
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[CANYON RESOURCES CORPORATION STRUCTURAL FLOW-CHART]
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The Company conducts a portion of its mineral exploration and
development through joint ventures with other companies. The Company has also
independently financed the acquisition of mineral properties and conducted
exploration and drilling programs and implemented mine development and
production from mineral properties in the western United States and exploration
programs in Latin America and Africa. (See "Item 2 - Properties.")
The Company is continually evaluating its properties and other
properties which are available for acquisition, and will acquire, joint venture,
market to other companies, or abandon properties in the ordinary course of
business subsequent to the date hereof.
OPERATIONS
During 1998, the Briggs Mine, located in southeastern California,
produced 80,316 ounces of gold and 22,138 ounces of silver. The Briggs Mine
achieved higher levels of production in 1998 than 1997 due principally to the
replacement of the three tertiary vertical shaft impact crushers by three cone
crushers. (See "Item 2 - Properties - Production Properties - Briggs Mine.")
In 1998, the Company, through its wholly owned subsidiary, CR Minerals
Corporation (CR Minerals), expanded its diatomaceous earth, or diatomite,
production and sales for the tenth consecutive year. During the year, CR
Minerals also completed the installation at its pumice and volcanic glass
processing plant located in Santa Fe, New Mexico, of new milling and drying
equipment which permits production of finely grained products. In December 1998,
the Company sold all of the assets of CR Minerals. (See "Financing - Asset
Sales.")
During 1998, the Kendall Mine located near Lewistown, Montana,
continued with closure activities, principally relating to collection, treatment
and disposal of water contained in the process system and mine area and to
revegetation of waste-rock dump surfaces.
During 1998 and 1997, all of the Company's revenues were generated by
its production facilities in the United States. Approximately 84% of the
Company's revenue in 1998 was derived from the Briggs Mine and 16% was derived
from its industrial mineral activities. In 1999 and subsequent years, the
Company anticipates that all of its revenues will be derived from precious
metals and that the Briggs Mine will be the only source of revenue until the
McDonald Gold Project or other projects are placed into production.
FINANCING
ASSET SALES
On December 31, 1998, the Company sold all of the assets of CR Minerals
Corporation to an investment group for $6,475,000 less certain working capital
adjustments. The consideration included $475,000 which was used to pay-off a
promissory note issued in connection with the Company's 1997 purchase of the
pumice mine which supplied ore to its New Mexico processing facility.
EQUITY OFFERINGS
On January 30, 1998, the Company completed an equity financing under a
Shelf Registration which raised $2.5 million ($2.3 million net of expenses)
through the sale of 2,490,000 shares of common stock.
On December 30, 1997, the Company completed an equity financing under a
Shelf Registration which raised $2.5 million ($2.2 million net of expenses)
through the sale of 2,510,000 shares of common stock.
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On June 11, 1997, the Company completed an equity financing under a
Shelf Registration which raised $10.0 million ($9.1 million net of expenses)
through the sale of 3,400,000 shares of common stock. Warrants to purchase
278,182 shares of common stock at a price of $4.05 per share were issued to the
Company's underwriter in connection with the financing. The warrants will expire
on June 5, 2000.
On March 26, 1996, the Company completed a private placement in the
amount of $12.1 million ($11.2 million net of expenses). The offering was
completed at a price of $3.00 per unit which included one share of common stock
(4,034,333 total shares) and one-half warrant (2,017,167 total warrants). Each
whole warrant entitles the holder to purchase one share of common stock at an
exercise price equal to $3.75 per share. A warrant to purchase 300,000 shares of
common stock was issued to the Company's underwriter and financial advisor in
connection with the private placement at the same terms and conditions. A
warrant to purchase 15,000 shares of common stock was exercised in March 1999
and the remaining warrants to purchase 2,302,167 shares of common stock expired
on March 25, 1999. The Company filed a Registration Statement under the
Securities and Exchange Act of 1933 in respect of the common shares, the
warrants, and the common shares underlying the warrants which was declared
effective on May 14, 1996.
During 1996, warrants to purchase 714,167 shares of common stock were
exercised at $3.50 per share, resulting in proceeds to the Company of $3.0
million. These warrants were part of equity financings in 1990 and 1992, in
which 3,943,632 total warrants were issued -- 3,229,465 warrants expired
unexercised in 1996.
BRIGGS MINE LOAN FACILITY
On December 6, 1995, the Company's wholly-owned subsidiary, CR Briggs
Corporation, obtained a $34.0 million loan facility to finance the capital
requirements of mine construction and working capital for its Briggs Mine in
California. The Company is guaranteeing the loan obligations of CR Briggs
Corporation, and the loan facility is collateralized by a first mortgage lien on
the property, non-leased assets of CR Briggs Corporation, and a pledge of the
Company's stock in CR Briggs Corporation. The facility was provided by a
syndicate of three banks, and includes three tranches; a $25 million gold loan;
a $5 million cash loan; and a $4 million cost overrun facility. Subject to
certain conditions, the Company has the right to convert loans of one type into
loans of another type. On December 27, 1995, drawing commenced on the facility
and $25.0 million principal in the form of a gold loan (monetized at $388.05 per
ounce, or 64,425 ounces) and $1.0 million principal as a dollar loan were drawn.
During 1996, an additional $4.0 million principal was drawn on the facility.
During 1997, the remaining $4.0 million was drawn.
In May 1998, the loan facility was restructured and included (i) the
modification of certain coverage ratios (as defined), (ii) a revision to the
amortization schedule for the gold loan, and (iii) the liquidation of the
Company's hedge position for all forward contracts with settlement dates beyond
June 30, 1998. The liquidation resulted in proceeds of $11.1 million which were
used to prepay in full the cash loans then outstanding of $8.6 million.
In August, 1998, the loan facility was further amended as follows: (i)
a six month, $1 million credit line at LIBOR plus 2 3/8% was established for
working capital needs ($650,000 drawn at December 31, 1998); (ii) the Company
pledged the stock of its subsidiary, CR Minerals, as additional collateral for
the loan; (the Company subsequently sold the assets of CR Minerals and has
reserved $2.4 million of the proceeds for further debt payments) (iii) certain
proceeds from any additional asset sales the Company may undertake will be used
to reduce the principal balance on the gold loan; and (iv) the $2.5 million
remaining from the May 1998 hedge liquidation was utilized for scheduled debt
service for the period ending September 30, 1998 (644 ounces of principal and
312 ounces of interest) and to further reduce the principal on the gold loan by
8,225 ounces.
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The following table summarizes principal and interest payments and
weighted average interest rates on the loan facility:
1998 1997 1996
---------- ---------- ----------
Principal payments
Gold loan
o Ounces 13,057 4,832 --
o Monetized amount $5,066,700 $1,875,000 --
Cash loans $8,700,000 $ 300,000 --
Interest payments
Gold loan
o Ounces 2,481 2,437 2,661
o Market value $ 730,700 $ 787,800 $1,023,300
Cash loans $ 390,900 $ 767,000 $ 364,200
Weighted average interest rates
Gold loan 3.5% 3.4% 4.1%
Cash loans 10.3% 10.2% 9.9%
========== ========== ==========
CR Briggs Corporation was not in technical compliance with an
operating cost covenant (as defined) as of December 31, 1998 and has been
unable to achieve resolution of the matter with the lenders to date. As a
result, the covenant breach constitutes an event of default and the lenders
may, by notice to CR Briggs Corporation, terminate the commitment and declare
all amounts immediately due and payable. The Company is in continuing
discussions with the lenders on this matter, however, there can be no
assurances that a satisfactory resolution can be achieved nor that the lenders
will not exercise any remedies available to them during the intervening period.
Accordingly, the Company has reclassified all of the debt as current on its
Balance Sheet at December 31, 1998, which resulted in the breach of other
covenants related to certain financial ratios and reporting requirements. CR
Briggs Corporation and the Company are also subject to cross-default provisions
without the giving of notice in respect of other indebtedness and agreements
which would cause such indebtedness to become due prior to its maturity.
Absent the lenders calling the loan, repayment terms generally require
quarterly installments which include scheduled principal reductions and a
varying cash sweep amount equal to 30% of free cash flow (as defined) after
primary debt service. After funding certain reserve accounts (as defined), if
necessary, remaining cash flow is available to the Company, subject to further
restrictive conditions. These restrictions include assertions of no potential
or actual defaults at the time of transfer and to the frequency of such
transfers.
LEASING ARRANGEMENTS
In addition to the loan facility described above, the Company leased
approximately $8.5 million of mining and electrical generation equipment for
the Briggs Mine from Caterpillar Financial Services. The equipment leases
generally have a 5-year term. During 1998, the Company also entered into a
5-year lease for the capitalized cost ($1.1 million) associated with the
replacement cone crushers at the Briggs Mine.
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DEBENTURE PLACEMENT
On June 2, 1993, the Company sold $22.0 million ($20.5 million after
expenses) of 6% Subordinated Convertible Notes (Notes) which were due June 1,
1998. The Notes were convertible at the option of the holder any time into
common shares at the rate of $3.45 per share. On or after June 1, 1996, the
Company could redeem the Notes by issuing common stock at a rate equal to 94% of
the then trading common stock price at the time of redemption, or by payment in
cash at par. On June 14, 1996, the Company gave notice to all holders of record
that Notes in the then aggregate principal amount of $21,075,000 would be
redeemed on July 12, 1996, by the issuance of common stock at a price equal to
$3.31 per share. The Company subsequently issued 6,346,100 shares in July, 1996,
in connection with the call for redemption.
AVAILABILITY OF MINERAL DEPOSITS; COMPETITION AND MARKETS
Gold mineralization is found in many countries and in many different
geologic environments, and in most cases is accompanied by the presence of
silver mineralization. Country politics and tax structure are important
criteria, as well as the geologic favorability, in the decision to invest in
exploration in a country. Since many companies are engaged in the exploration
and development of gold properties and often have substantially greater
technical and financial resources than the Company, the Company may be at a
disadvantage with respect to some of its competitors in the acquisition and
development of suitable mining prospects. Mineral properties in an early stage
of exploration, or not currently being explored, are often relatively
inexpensive to acquire; therefore, the Company believes that the expertise of
its staff and its ability to rapidly evaluate and respond to opportunities allow
it to compete effectively with many companies having far greater financial
resources. In recent years the political environments in many countries of the
world have become favorable to investment in the mining industry. The Company
believes that, in particular, many of such countries in Latin America and Africa
host favorable geologic conditions for the occurrence of sizeable gold deposits.
For these reasons, the Company has expanded its exploration for gold, silver and
other precious metals from the Western United States to several countries in
Latin America and Africa.
In general, larger and higher grade gold deposits can be produced at a
lower cost per ounce than smaller and lower grade deposits. Also deposits that
can be mined by open pit methods usually can be exploited more economically than
those which must be mined by underground methods. The Company believes that the
McDonald gold deposit would have production costs close to or below the
world-wide average for gold mines, if cyanide treatment is allowed in the state
of Montana (See "Development Properties Seven-Up Joint Venture -- Legal
Status".) There are numerous large gold mining operations throughout the world
owned by other companies that are able to produce gold for a lower cost than the
Company. Demand for gold and other factors in the financial marketplace have
more of an impact on the gold price than does the production of larger, lower
cost producers. Therefore, the principal competitive factor for the Company is
acquiring suitable mining prospects rather than marketing gold.
The marketing of all minerals is affected by numerous factors, many of
which are beyond the control of the Company. Such factors include the price of
the mineral in the marketplace, imports of minerals from other nations, demand
for minerals, the availability of adequate refining and milling facilities, and
the market price of competitive minerals used in the same industrial
applications. The market price of minerals is extremely volatile and beyond the
control of the Company. Gold prices are generally influenced by basic
supply/demand fundamentals. The market dynamics of supply/demand can be heavily
influenced by economic policy; e.g., central banks sales/purchases, political
unrest, conflicts between nations, and general perceptions about inflation.
Fluctuating metal prices may have a significant impact on the Company's results
of operations and operating cash flow. Furthermore, if the price of a mineral
should drop dramatically, the value of the Company's properties which are being
explored or developed for that mineral could also drop dramatically and the
Company might not be able to recover its investment in those properties. The
decision to put a mine
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into production, and the commitment of the funds necessary for that purpose,
must be made long before the first revenues from production will be received.
During the last five years, the average annual market price of gold has
fluctuated between $294 and $388 per ounce. Price fluctuations between the time
that such a decision is made and the commencement of production can completely
change the economics of the mine. Although it is possible to protect against
price fluctuations by hedging in certain circumstances, the volatility of
mineral prices represents a substantial risk in the mining industry generally
which no amount of planning or technical expertise can eliminate. The Company's
practice has generally been to sell its minerals at spot prices, unless price
hedging was required in connection with obtaining loan facilities. In connection
with the Company obtaining a loan facility for its Briggs Mine in 1995, a
portion of the Mine's production was hedged to ensure adequate cash flow for
repayment of the obligation. At December 31, 1998, approximately 46% of the
Briggs Mine production from current reserves was hedged through a gold loan and
forward contracts at an average price of $323 per ounce.
CUSTOMERS
During 1998 and 1997, the Company sold its gold and silver production
primarily to two precious metal buyers, NM Rothschild & Sons Limited and
Bayerische Hypo-und Vereinsbank AG (formerly Bayerische Vereinsbank AG). During
1996, the Company sold its gold and silver production to NM Rothschild & Sons
Limited. Given the nature of the commodities being sold and because many other
potential purchasers of gold and silver exist, it is not believed that the loss
of such buyers would adversely affect the Company.
ENVIRONMENTAL MATTERS
The exploration, development, and production programs conducted by the
Company in the United States are subject to local, state, and federal
regulations regarding environmental protection. Many of the Company's mining and
exploration activities are conducted on public lands. The U.S.D.A. Forest
Service extensively regulates mining operations conducted in National Forests.
Department of Interior regulations cover mining operations carried out on most
other public lands. All operations by the Company involving the exploration for
or the production of minerals are subject to existing laws and regulations
relating to exploration procedures, safety precautions, employee health and
safety, air quality standards, pollution of water sources, waste materials,
odor, noise, dust and other environmental protection requirements adopted by
federal, state, and local governmental authorities. The Company may be required
to prepare and present to such authorities data pertaining to the effect or
impact that any proposed exploration for or production of minerals may have upon
the environment. The requirements imposed by any such authorities may be costly,
time consuming, and may delay operations. Future legislation and regulations
designed to protect the environment, as well as future interpretations of
existing laws and regulations, may require substantial increases in equipment
and operating costs to the Company and delays, interruptions, or a termination
of operations. The Company cannot accurately predict or estimate the impact of
any such future laws or regulations, or future interpretations of existing laws
and regulations, on its operations.
The United States has an extensive framework of environmental
legislation that undergoes constant revision. The Company participates in the
legislative process through independent contact with legislators and through
trade organizations to assist legislative bodies in making informed decisions.
Historic mining activities have occurred on certain properties held by
the Company. In the event that such historic activities have resulted in
releases or threatened releases of regulated substances to the environment,
potential for liability may exist under federal or state remediation statutes.
The Company is not aware of any pending claims under these statutes at this
time, and cannot predict whether any such claims will be asserted in the future.
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The Company has spent approximately $5.4 million on reclamation and
closure activities at the Kendall Mine through December 31, 1998, and expects to
spend approximately $1.0 million during 1999 and a further $1.8 million beyond
1999 through mine closure. At December 31, 1998, the Company has fully accrued
for its remaining anticipated expenditures. The Company currently maintains a
$1.9 million bond with the Montana Department of Environmental Quality to ensure
appropriate reclamation.
The Briggs Mine operates under a number of permits issued by state,
local and federal agencies. Moreover, the Company was required to post a $3.03
million reclamation bond to ensure appropriate reclamation and a $1.01 million
bond to ensure adequate funds to mitigate any "foreseeable release" of
pollutants to state waters.
The Company also maintains several reclamation bonds on its exploration
and development properties, the most significant of which is a $0.5 million bond
with the Montana Department of Environmental Quality at the McDonald Gold
Project.
The Company's bonds are partially collateralized by a Letter of Credit
which is fully collateralized with cash ($2.1 million at December 31, 1998). In
March 1999, the Company received a demand notice for an increase in collateral
of approximately $1.2 million from the Surety who issued the bonds. The Company
is not presently able to honor the demand due to its financial position and is
unsure what remedies, if any, the Surety may seek for resolution on the matter.
Environmental regulations add to the cost and time needed to bring new
mines into production and add to operating and closure costs for mines already
in operation. As the Company places more mines into production, the costs
associated with regulatory compliance can be expected to increase. Such costs
are a normal cost of doing business in the mining industry, and may require
significant capital and operating expenditures in the future. Additional
information and the potential effects of environmental regulation on specific
Company properties are described in "Item 2-Properties."
To date, the Company has done only minor work on its Latin American and
African properties which involved surface disturbance. Hand dug and mechanical
trenching and limited drilling has been conducted on two properties in Ethiopia.
Although some of the countries in which the Company works have not as yet
developed environmental laws and regulations, it is the Company's policy to
adhere to North American standards in its foreign operations. The Company cannot
accurately predict or estimate the impact of any future laws or regulations
developed in foreign countries on our operations.
The Company believes that it is currently in compliance with all
applicable environmental regulations.
EMPLOYEES
As of March 1, 1999, the Company and its wholly-owned subsidiaries
employed 150 persons, which number may adjust seasonally. None of the Company's
employees are covered by collective bargaining agreements.
SEASONALITY
Seasonality does not have a material impact on the Company's
operations.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS & GOVERNMENT
CONTRACTS
Other than interests in mining properties granted by governmental
authorities and private landowners, the Company does not own any material
patents, trademarks, licenses, franchises or concessions.
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ITEM 2. PROPERTIES
The following table provides a summary of the most significant
properties in which the Company has an interest as of December 31, 1998. More
detailed information regarding each of these properties is provided in the text
that follows.
CANYON RESOURCES CORPORATION
PROPERTIES AS OF 12/31/98
PROPERTY INTEREST NATURE OF INTEREST DATE ACQUISITION DEVELOPMENT ANTICIPATED
INTEREST COST OF CAPITAL TO TIME OF
ACQUIRED INTEREST(1) MAKE PROPERTY COMMENCEMENT
OPERATIONAL OF OPERATIONS
- ---------------------- -------- ------------------------- ---------- ------------- ------------- -------------
PRODUCTION PROPERTIES
Briggs Mine 100% Unpatented Mining Claims 1990 $7.7 million $42.2 million In production
Kendall Mine 100% Mineral Lease 1987, 1990 $15.2 million $1.6 million In reclamation
DEVELOPMENT PROPERTIES
Seven-Up Pete 100% Mineral Leases 1990, 1997 $10.2 $230 million Unknown(4)
Venture million(3) (estimated)
EXPLORATION PROPERTIES
Panamint 100% Unpatented Mining Claims 1990 $0.3 million Unknown Unknown
Range
Montana 100% Mainly fee mineral rights 1990 $2.1 million Unknown Unknown
900,000 acres
Arroya Cascada 100% Mineral License 1994 Nil Unknown Unknown
(Argentina)
Other Argentine 100%(2) Mineral Claims (Cateos) 1994 Nil Unknown Unknown
properties
San Pedrito 100% Mineral Concession 1995 Nil Unknown Unknown
(Panama)
Ethiopian 90%(2) Exploration Licenses 1995-1996 Nil Unknown Unknown
Properties
Chegutu 90% Exploration License 1995 Nil Unknown Unknown
(Zimbabwe)
1 Net to Canyon's interest in the property.
2 Subject to joint-venture or purchase provisions.
3 To date - an additional amount of not less than $95 million nor more than
$145 million will be paid to Phelps Dodge when all permits have been achieved
or construction commences.
4 See discussion at "Development Properties - Seven-Up Pete Venture - Legal
Status."
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PRODUCTION PROPERTIES
BRIGGS PROJECT
General
The Briggs project, located on the west side of the Panamint Range near
Death Valley, California, was acquired by the Company in 1990. It is 16 miles
northeast of Trona and 35 miles northeast of Ridgecrest in Inyo County,
California. Access from Trona is by 33 miles of paved and graded gravel roads.
The Company owns or controls, through leasehold interests, 100% of the Briggs
Mine, subject to a 2% net smelter return royalty.
Briggs' holdings include 784 unpatented mining claims, 70 mill site
claims, 1 tunnel site claim, 53 unpatented placer mining claims, 1 patented
millsite claim, and 2 patented mining claims that comprise an area of
approximately 17,176 acres. The passage of the California Desert Protection Act
in 1994 removed all of the Company's holdings from Wilderness Study Areas.
Canyon's mining claims are now located on land prescribed for multiple use
management by the U.S. Bureau of Land Management. Patent applications were filed
for certain claims on the Briggs deposit during 1993; however, no assurances can
be made that these patent applications will be issued.
Operations
The Briggs Mine is an open-pit, heap leach operation, initially
designed to produce an average of 75,000 ounces of gold per year over a
seven-year life. The ore is crushed in three stages to a minus 1/4 inch size and
is conveyor stacked on the leach pad. Gold is recovered from leach solutions in
a carbon adsorption plant and refined into dore bars on site. The Company
expects to increase the initial design production rate to approximately 90,000
ounces per year in 1999 and onward.
Mine development and construction of facilities began on December 16,
1995. Facilities include a 12,000 ton per day crushing plant, leach pad, process
ponds, recovery plant, office and lab buildings, and a maintenance shop.
Crushing of ore commenced on July 29, 1996, and first gold production occurred
on October 16, 1996. Limited production was realized through the remainder of
1996, yielding 3,417 ounces of gold.
In March 1997, the Briggs Mine achieved commercial production levels
and, for the year, produced 66,769 ounces of gold and 19,215 ounces of silver.
During 1997, 9.3 million tons were mined, of which 2.8 million tons were ore
with an average grade of 0.033 ounce of gold per ton and a waste-to-ore strip
ratio of 2.3 to 1.
Lower crushing throughput and higher than expected operating costs were
experienced in 1997, principally relating to unsatisfactory performance of the
tertiary stage vertical shaft impact crushers. In early 1998, these units were
replaced with three cone crushers with the objective of reducing costs and
increasing throughput. A scheduled expansion of the leach pad was completed
during 1997 at a cost of $2.1 million. This expansion was financed by drawing on
the final $4.0 million tranche of the Company's loan facility. (See "Item 1 -
Business - Financing.")
During 1998, 10.5 million tons were mined, of which 3.4 million tons
were ore with an average grade of 0.030 ounce of gold per ton and a waste-to-ore
strip ratio of 2.0 to 1. The Briggs Mine produced 80,316 ounces of gold and
22,138 ounces of silver in 1998.
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Statistical production and financial data for the Briggs Mine are shown
on the following table.
BRIGGS MINE OPERATIONS
1998 1997 1996
----------- ----------- -----------
PRODUCTION
Tons Mined (waste and ore) 10,479,800 9,321,500 5,516,600
Tons Ore Mined 3,395,700 2,845,300 798,300
Gold Grade of Ore (oz/ton) 0.030 0.033 0.043
Strip Ratio (tons waste/tons ore) 2.0:1 2.3:1 5.9:1
Gold Production (oz) 80,316 66,769 3,417
Silver Production (oz) 22,138 19,215 654
Recoverable Gold Inventory (oz) 25,170 23,899 24,267
FINANCIAL
Ounces of Gold Sold (1) 79,303 68,436 1,500
Average Gold Price Realized $ 375 $ 401 $ 406
Revenue from Mine Operations (1) $29,773,400 $27,491,500 $ 608,600
Cash Operating Cost Per Ore Ton Mined $ 6.49 $ 6.27 N/A
Cash Operating Cost Per Ounce(2) $ 278 $ 290 N/A
Total Production Cost Per Ounce (2) $ 368 $ 383 N/A
Operating Earnings (3) (4) $ 540,500 $ 882,900 N/A
Capital Expenditures (4) $ 203,100 $ 3,141,600 $28,083,500
MINEABLE RESERVES (1/1/99) $350 GOLD $300 GOLD
---------- ----------
Tons Ore 17,706,400 17,133,900
Grade 0.035 0.035
Contained Gold Ounces 613,820 594,770
(1) Proceeds from 1996 gold sales and 8,150 ounces in 1997 credited against
development costs.
(2) As calculated under The Gold Institute's Production Cost Standard.
(3) Prior to interest income (expense) and other non-operating items.
(4) Excludes exploration and development drilling and permitting costs for
reserve expansion.
Development
Development drilling in 1997 at North Briggs and Goldtooth, located
immediately north and south, respectively, of the Briggs Mine, identified the
following mineable reserves, which are included in the above Briggs Mine
reserves:
$350 GOLD PRICE $300 GOLD PRICE
ORE TONS GRADE OUNCES ORE TONS GRADE OUNCES
--------- ----- -------- --------- ------ -------
Goldtooth 2,655,600 0.036 96,850 2,537,600 0.036 93,050
North Briggs 3,160,000 0.053 167,420 2,705,500 0.053 152,170
5,815,600 0.045 264,270 5,243,100 0.047 245,220
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The reserves at North Briggs were defined by 151 drillholes and occur
subparallel to the topography, along a low-angle detachment fault, with
increased thickness of mineralization eastward approaching the high- angle
regionally persistent Goldtooth fault. The gold mineralized structure at North
Briggs is still open to the northeast and east. The Goldtooth reserves, defined
by 132 drillholes, occur primarily in steeply dipping orientation within
favorable rock units adjacent to the Goldtooth fault.
Environmental Regulation
The Briggs Mine operates under the requirements of the following
permits and agencies: 1) Plan of Operations, U.S. Bureau of Land Management: 2)
Mining and Reclamation Plan, Inyo County; 3) Waste Discharge Requirements,
Lahontan Regional Water Quality Control Board; 4) Permits to Construct and
Permits to Operate, Great Basin Unified Air Pollution Control District; and 5)
Section 404 Dredge and Fill Permit, Army Corps of Engineers. The permits issued
to date are adequate for all mine operations involving currently identified
mineable reserves in the Briggs deposit. Additional permits will be required to
allow mining of the North Briggs and Goldtooth deposits. A local environmental
group, allied with the Timbisha Shoshone Indian Tribe (collectively Appellants),
initiated various actions in opposition to the Briggs permits. The Company has
prevailed in all actions at the administrative, trial court, and appellate
level.
The BLM, Inyo County, the California Department of Conservation, and
the Lahontan Regional Water Quality Control Board (Lahontan) have jointly
required the Company to maintain a $3,030,000 reclamation bond to ensure
appropriate reclamation of the Briggs Mine. Additionally, Lahontan requires that
the Company maintain a $1,010,000 bond to ensure adequate funds to mitigate any
"foreseeable release" of pollutants to state waters. These bonds are subject to
annual review and adjustment.
The North Briggs and Goldtooth reserves will require new permits from
the BLM and Inyo County prior to being mined. In order for those agencies to
issue the permits, it will be necessary for those agencies to first complete
either an environmental assessment or an environmental impact statement under
the National Environmental Policy Act and either a negative declaration or an
environmental impact report under the California Environmental Quality Act.
KENDALL MINE
General
The Kendall Mining District is located approximately 20 miles
north of Lewistown, Montana, and is accessible by paved U.S. highway and graded
dirt roads. The property rights controlled by the Company include (i)
approximately 253.61 acres in patented claims and fee land; and (ii) mining
leases on approximately 1,932 acres in 71 patented mining claims and fee land.
The Kendall Mine was developed as an open-pit, heap-leach gold mine in
September 1988, under the management of the Kendall Venture, a joint venture
between the Company and Addwest Gold, Inc. (Addwest). On January 26, 1990, the
Company acquired all of the issued and outstanding common stock of Addwest and
through its wholly owned subsidiary, CR Kendall Corporation, became the operator
and sole owner of the operating interest in the Kendall Mine.
Operations
Through 1995, the Kendall Mine operation leached gold and silver from
crushed ore on a year-round basis. Mining and crushing of all remaining ore was
completed in January 1995. Leaching of the remaining
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gold in the heap leach pads continued through early 1997. All economic gold has
now been recovered, and the mine is currently in a reclamation and closure mode.
During 1997, the two heap leach pads were rinsed of residual cyanide by
continuous circulation of water and a treatment plant using reverse osmosis
technology was installed to reduce dissolved metals so that water from the
process system could be discharged. The Company expects to re-contour and cover
the heap leach pads with an engineered soil cap of clay and commence
revegetation efforts of the heaps in 2000. The Company is currently evaluating
long-term water treatment technologies for expected residual draindown of the
heaps and waste-rock dump seepage.
Statistical production and financial data of the Kendall Mine for the
last five years is shown on the following table.
KENDALL MINE OPERATIONS
1998 1997 1996 1995 1994
---- ---- ----- ------ ------
PRODUCTION
Tons Mined (waste and ore)(000) -- -- -- 45 7,570
Tons Ore Mined (000) -- -- -- 21 1,588
Gold Grade of Ore (oz/ton) -- -- -- 0.079 0.044
Actual Strip Ratio (tons waste/tons ore) -- -- -- 1.1:1 3.8:1
Gold Production (oz) 357 633 3,607 16,624 48,391
Silver Production (oz) 47 131 1,762 7,429 22,503
Recoverable Gold Inventory (oz) -- -- -- 7,000 20,608
(unleached gold in heap and ore stockpile)
FINANCIAL (NET TO CANYON)
Ounces of Gold Sold1 339(7) 622(7) 3,269(6) 16,386 45,877
Average Gold Price Realized ($/oz) 302(7) 327(7) 392(6) 386 374
Revenue From Mine Operations ($000) 102(7) 204(7) 1,282(6) 6,331 17,154
Operating Cost/Ore Ton Mined ($)2 --(3) --(3) --(3) --(3) 6.87
Operating Cost/Gold Ounce Sold ($)2 --(5) --(5) --(5) 362 238
Operating Earnings ($000) --(5) --(5) --(5) 391(4) 6,240
Capital Expenditures ($000) -- -- 168 477
1 Gold production net to Canyon after payment in kind of 5% royalty.
2 Includes royalty, severance taxes, overhead, and reclamation reserve.
3 Not meaningful, as active mining of new ore ceased in January, 1995.
4 Prior to provision for final site restoration of $1.1 million.
5 Not meaningful due to low production levels.
6 Through September 30, 1996. Subsequent 1996 sales and proceeds (138
ounces and $51K of proceeds) credited against reclamation costs.
7 Credited against reclamation costs.
Environmental Regulation & Reclamation
The Kendall Mine operates under permits issued by the Montana
Department of Environmental Quality (DEQ) and other regulatory agencies. A life
of mine permit was granted by the DEQ on November 1, 1989.
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The Company is negotiating details of final mine closure with the DEQ. DEQ has
approved the portions of the closure plan related to recontouring, revegetation,
drainage and heap dewatering. Discussions of long-term water handling and heap
closure methods continue.
In early 1996, the Company installed a system to capture and collect
drainage from certain mine facilities. The DEQ, the Environmental Protection
Agency, and the Company have inspected the system subsequent to its initial
installation and have agreed on system improvements which have been completed.
The Company will maintain, monitor, and, if necessary, improve the system until
the DEQ determines that the system is no longer needed. In October 1997, the
Company applied for a Montana Pollutant Discharge Elimination System (MPDES)
permit to cover seepage from waste rock piles. The DEQ is reviewing the permit
application.
The DEQ has issued a Notice of Violation and Administrative Order to CR
Kendall for alleged water quality violations for the period from September 1,
1996 through October 31, 1997. (See " Item 3 - Legal Proceedings".)
The DEQ requires that the Company maintain a $1,869,000 reclamation
bond to ensure appropriate reclamation of the Kendall Mine. DEQ is currently
reviewing the adequacy of this bond amount under their ongoing obligation to
periodically review mining bonds. The Company anticipates that the DEQ will ask
for additional bond, but it is not possible to accurately predict actual
amounts.
Reclamation has been ongoing throughout the life of the operation.
Disturbed areas are contoured and topsoil is replaced and reseeded as soon as
possible. During 1998, approximately two disturbed acres were reclaimed, and no
additional acres were disturbed. The Company's reclamation expenditures in 1998
were approximately $1.1 million, primarily related to treatment and disposal of
process water, capture and treatment of waste rock dump seepage, and improved
drainage and sediment controls.
Final reclamation will require disposal of captured water, recontouring
of spent ore heaps, roads and other areas and redistribution of topsoil and
reseeding of some disturbed areas. Bond release on the property will only take
place once the regulatory agencies have given final approval to all closure
measures and are satisfied that the mine has met all reclamation requirements.
There is no assurance of agency satisfaction with mine closure.
The Kendall Mine uses internal and external technical and legal experts
to monitor and ensure environmental compliance. The Company believes the
operation is currently in material compliance with all environmental and safety
regulations.
DEVELOPMENT PROPERTIES
SEVEN-UP PETE VENTURE
General
Prior to September 25, 1997, through its wholly owned-subsidiary, CR
Montana Corporation (CR Montana), the Company owned a 27.75% interest in the
Seven-Up Pete Venture (SPV) which includes the Seven-Up Pete gold deposit, the
McDonald gold deposit, and the Keep Cool exploration property. Phelps Dodge
Mining Company, a subsidiary of Phelps Dodge Corporation (Phelps Dodge), was the
operator of the SPV.
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On September 25, 1997, Canyon and CR Montana purchased the 72.25%
participating interest in the Seven-Up Pete Joint Venture, including the
McDonald Gold Project, from Phelps Dodge. The purchase increased Canyon's
effective ownership in the project to 100%. Canyon made an initial payment of $5
million to Phelps Dodge, as part of a purchase price which shall be no less than
$100 million and no more than $150 million. No additional payments are required
until after all permits have been achieved or construction commences. The
largest part of the purchase price, $30 per mineable reserve ounce attributable
to the former Phelps Dodge ownership, is to be paid after all permits have been
obtained and construction of the mine is underway. The purchase payments are
collateralized only by the 72.25% participating interest and underlying assets
being transferred from Phelps Dodge to Canyon.
The Seven-Up Pete and McDonald properties are located six to eight
miles east of Lincoln and 45 miles northwest of Helena, in Lewis and Clark
County, Montana. Access to the properties is by dirt roads from a paved highway
that crosses the property. The SPV consists of approximately 21 square miles of
patented and unpatented mining claims and mineral leases of fee and state land,
in general subject to a 5% net smelter returns royalty. During 1994, the state
lease upon which substantially all of the currently identified McDonald orebody
is located was amended. The amendment extended the primary ten-year term of the
lease for the time required for review and approval of permit applications for
development of the property, including the time required to resolve any appeals
of permit approvals. In addition, the lease may also be held thereafter by the
production of minerals in paying quantities or the payment of a delay rental of
$150,000 per month. The amendment also, along with similar amendments to five
other adjacent state leases, provides for cross-mining on all six leases and the
consolidation of the six leases under a single management unit.
During 1998, the Company funded approximately $4.0 million for SPV
expenditures primarily for permitting activities.
Geology and Exploration
McDonald Property
During 1989 and 1990, exploration conducted on the McDonald property
included geophysical and geochemical surveys, preliminary metallurgical testing,
and drilling of 76 holes for a total of 41,331 feet. This early exploration
drilling discovered a sizeable gold deposit. The McDonald property is partially
covered by a siliceous sinter deposited by an ancient hot spring system. The
sinter overlies shallow dipping volcanic units which have been strongly
fractured and mineralized. The gold mineralization occurs primarily in a
favorable rhyolitic volcanic unit. Drilling on the McDonald property continued
from 1991 through 1994. Analysis of the drill data through the end of 1992
indicated that the McDonald deposit contains 8.2 million ounces of gold within
414.4 million tons of mineralized rock with an average grade of 0.020 ounce of
gold per ton (opt), using a cutoff grade of 0.008 opt.
In 1993 Davy International completed a Feasibility Study that indicated
that 205.1 million tons of the McDonald deposit, with an average grade of 0.025
opt and containing 5.2 million ounces of gold, could be mined economically (at a
gold price of $375/oz.) in an open-pit, heap-leaching operation. The study
indicated that mining and crushing of 121 million tons of ore above a 0.016 opt
cutoff grade (with an average grade of 0.034 opt) and mining and direct loading
onto the leach pad of an additional 84 million tons of lower grade ore
(averaging 0.012 opt) could, with an expected average 72% recovery of the
contained gold, produce approximately 300,000 ounces of gold per year over a
12-year mine life. The expected waste-to-ore ratio would be 2.1:1. Initial
capital costs for the project, including pre-production stripping, were expected
to be approximately $188 million. Operating costs, including royalty, severance
and property taxes, and reclamation reserve, were expected to be approximately
$231 per ounce of gold produced.
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Through the end of 1996, the McDonald gold deposit had been defined
through the drilling of 609 drillholes, containing 469,000 feet, over an area of
approximately 8,000 feet in east-west dimension and 5,000 feet in north-south
dimension. Seventy-nine of these drillholes, including 56,300 feet, were
coreholes. This data base includes 168 holes drilled since the 1993 Feasibility
Study. Every five foot sample interval has been assayed by outside commercial
labs for its gold content, with routine check assays. The rock obtained in the
coreholes was used extensively for metallurgical testing of leaching
characteristics of the deposit.
In late 1997, Canyon undertook a complete remodeling of the McDonald
gold deposit, with all of the drill data. In the remodeling work, samples from
every five-foot interval of all of the drillholes were re-examined. The
remodeling was conducted under the direction of MRDI, Canada, an international
consulting engineering firm. The remodeling indicates that the McDonald gold
deposit contains 9.3 million ounces of gold, averaging 0.019 opt, using a cutoff
grade of 0.008 opt; including 6.0 million ounces, averaging 0.029 opt, using a
cutoff grade of 0.016 opt; including 4.9 million ounces, averaging 0.034 opt,
using a cutoff grade of 0.020 opt.
MCDONALD GOLD DEPOSIT
MINERAL INVENTORY
CUT-OFF GRADE TONS GRADE OUNCES GOLD
(OPT GOLD) (MILLIONS) (OPT GOLD) (THOUSANDS)
------------- ---------- ---------- -----------
0.006 644.2 0.016 10,299
0.008 494.5 0.019 9,280
0.012 312.5 0.024 7,508
0.016 207.2 0.029 6,058
0.020 142.3 0.034 4,901
0.025 92.1 0.041 3,786
0.035 45.6 0.053 2,436
Canyon's ongoing engineering analysis projects that gold can be
produced profitably from the McDonald deposit at gold prices in the $300 to $350
per ounce range. Under the current $350 gold price mine plan, mineable reserves
containing 7.2 million ounces of gold would be mined, with the production of 5.0
million ounces of gold and 10 million ounces of silver over a 14-year period.
Under this mine design, mining and crushing of 131 million tons of ore above a
0.016 opt cutoff grade (with an average grade of 0.033 opt) and mining and
direct loading onto a leach pad of an additional 258 million tons of lower grade
ore (averaging 0.011 opt) would, with an expected average recovery of 81% of the
contained gold from the crushed rock and 52% from the run-of-mine rock, would
produce approximately 385,000 ounces of gold per year over the mine life. Cash
operating costs for the $350 gold price mine plan are estimated at $180 per
ounce. Initial capital costs are estimated at approximately $225 million. More
detailed engineering work will cause these numbers to be further defined.
Environmental baseline studies have been conducted since 1989,
providing the necessary information to design and locate facilities for the
proposed McDonald gold mine. Baseline studies include air quality, meteorology,
surface water, groundwater, wildlife, fisheries, aquatics, vegetation, soils,
recreation, transportation, visual resources, wetlands, cultural resources, and
socioeconomics.
In 1994 the SPV completed environmental baseline and engineering
studies that demonstrate that the proposed McDonald gold mine can be operated in
an environmentally sound manner. This information was used to prepare and file
an application for Plan of Operations with the Montana
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Department of Environmental Quality (DEQ) in November 1994. The DEQ declared the
application complete in 1996 and is preparing an Environmental Impact Statement
(EIS) with the Montana Department of Natural Resources and Conservation (DNRC)
and the US Army Corps of Engineers (COE) as co-lead agencies.
The agencies hired experienced consulting firms to prepare the EIS. The
consultants will complete the EIS under supervision of the lead agencies with
the SPV bearing all costs through an arrangement with the lead agencies. The
lead agencies were actively preparing the EIS when the threat of the
anti-cyanide gold mining initiative, I-137, was proposed mid-year 1998. With the
threat of passage and the actual passage of I-137 in November 1998, all
permitting work on the McDonald project has been suspended. (See "Legal
Status".)
Most of the McDonald gold deposit occurs on land owned by the State of
Montana and is subject to a 5% net smelter returns royalty payable to the state
school lands trust, the principal beneficiary of which is Montana Tech, part of
the state university system. A minor portion of the McDonald gold deposit occurs
on land owned by the Sieben Ranch Company (SRC) and is subject to a 5% net
smelter returns royalty. In 1997, the SPV entered into a purchase option
agreement with SRC whereby, after all permits to construct the mine are
achieved, SPV will purchase all of the SRC lands that are included in the
McDonald mine plan. The royalty would still be payable to the SRC upon
production.
Seven-Up Pete Property
Between 1989 and 1993, exploration, bulk sampling, development studies,
metallurgical testing, and environmental baseline studies were conducted on the
Seven-Up Pete property. By 1993, the total drilling on the property was 378
holes for 159,410 feet of drilling. A draft preliminary Feasibility Study was
completed in January, 1993, updating an earlier 1991 study. The 1993 Preliminary
Feasibility Study indicates that the Seven-Up Pete gold deposit contains 10.3
million tons of mineralized rock with an average grade of 0.058 ounce of gold
per ton.
A comprehensive Pre-Feasibility Study completed in early 1999 documents
that the Seven-Up Pete deposit is economically viable at gold prices between
$300 per ounce and $400 per ounce when developed in conjunction with the nearby
McDonald Gold Project. The Seven-Up Pete ores would be mined in an open pit,
hauled by truck to the McDonald site, and crushed and heap leached at the
McDonald facility. Using a dilution factor of 25%, the mineable reserves of the
Seven-Up Pete deposit are 11.7 million tons, with an average grade of 0.051
ounce of gold per ton and 0.24 ounce of silver per ton, containing 600,450
ounces of gold and 2.4 million ounces of silver. These reserves can be mined
with an average strip ratio (waste tons/ore tons) of 3.9:1. The Pre-Feasibility
study shows that the Seven-Up Pete ore can be mined at a rate of 1.5 million
tons per year, from which a total of 450,000 ounces of gold and 1.1 million
ounces of silver can be produced over an eight-year period at an average cash
operating cost of $160 per ounce of gold. Initial capital costs are projected to
be approximately $18 million.
There are no current plans to develop the Seven-Up Pete deposit at this
time, in that I-137 is in effect. Prior to its development at any time in the
future, an Environmental Impact Study for Seven-Up Pete would have to be
prepared which would consider the cumulative impact of the McDonald operation.
The Seven-Up Pete property is covered by middle Tertiary andesitic
volcanic rocks. The most important controls on mineralization at Seven-Up Pete
are north to northwest-trending faults that have localized
quartz-pyrite-precious metal mineralization. The structures generally dip to the
west and can be up to 150 feet wide. Gold and silver occur in high grade quartz
veins that are localized near the margins of the shear zone, as well as in lower
grade shattered zones between the high grade veins. Gold mineralization occurs
as free gold as well as submicroscopic particles associated with pyrite.
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Environmental Regulation
The McDonald deposit occurs on private and state lands. There are no
federal lands involved in the Plan of Operations for the McDonald project. The
Seven-Up Pete deposit occurs on patented mining claims within a U.S. National
Forest. As with all mining projects, careful environmental study and permitting
will be required before a mine can be developed on either property. There are
no assurances that all needed permits will be issued nor that, in the event
they are issued, such issuance will be timely, nor that conditions contained in
permits issued by the agencies will not be so onerous as to preclude
construction and operation of the project.
Mining activity in the United States is subject to the granting of
numerous permits under applicable Federal and State statutes, including, but
not limited to, the National Environmental Policy Act, the Clean Water Act, the
Clean Air Act, and the Montana Environmental Policy Act. It is not legal to
engage in mining activity without securing the permits required by these and
other statutes. Initiation of gold production at the McDonald project will thus
require the granting of numerous permits, some of which are discretionary.
Major permits include the Operating Permit from the DEQ, the Operating
Plan from the DNRC, the Air Quality Permit (DEQ), the Montana Pollutant
Discharge Elimination System Permit (DEQ), a Non-Degradation Authorization
(DEQ), a Stormwater Discharge Permit (DEQ), a Water Rights Permit (DNRC), a
Section 404 Dredge and Fill Permit from the U.S. Army COE, and a Fiscal Impact
Plan which must be approved by the Montana Hard Rock Impact Board and numerous
local government units.
An EIS was being prepared by three co-lead agencies, DEQ, DNRC, and
COE, when the anti-cyanide initiative, I-137, was passed, thus terminating
active work on the EIS. This EIS would be used to support all of the major
permit decisions. No assurance can be given that such permits will be issued,
or if issued, in what time frame such issuance would occur.
Legal Status
On November 3, 1998, an anti-cyanide mining initiative, I-137, passed
52% to 48% by a vote of the Montana electorate, effectively bringing permitting
work on the SPJV to a standstill. This bill bans development of new gold and
silver mines and expansions to existing mines which use open-pit mining and
cyanide in the treatment and recovery process in the State of Montana. For most
of the campaign period leading up to the vote, mining companies were prevented
from campaigning due to a previously passed initiative (I-125) which prohibited
campaign expenditures by "for-profit" entities. Just 10 days prior to the
election, a federal judge declared the prohibition "unconstitutional."
The mining community has filed lawsuits against I-137, based on i)
having been denied the opportunity to campaign due to the effectiveness of
I-125 until the last few days of the campaign, and ii) due process
considerations, in that I-137 results in a taking of property without any
compelling public policy interest, since environmental safety concerns are well
protected and monitored with existing laws and regulations.
The Company's legal counsel believes that it is likely that I-137 will
be declared unconstitutional, or at a minimum, be overturned by the courts.
Should all efforts to overturn I-137 fail, the Company would file a "takings
lawsuit" and pursue compensation from the state for economic damages. The
amount of a takings lawsuit would depend on the price of gold at that time and
other factors, but the Company expects that such a "takings" could be as much
as $600 million, before litigation and related expenses.
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PRINCIPAL EXPLORATION PROPERTIES
The status of exploration activities on the Company's major
exploration properties is described below. The properties described are
believed to be the most significant of the Company's current inventory.
However, that inventory is constantly changing and it is to be expected that
some of the properties discussed will eventually be joint-ventured, marketed or
abandoned, and that other properties owned or acquired by the Company will
become the object of more intensive exploration activities.
The Mountain View property in Nevada and the Rio Maria property in
Brazil were dropped during 1998 due to the low gold prices and resulting
inability to obtain a partner or buyer for the properties. The Dominican
Republic company, Minera Hispaniola, (40% owned by Canyon) and its underlying
properties were sold during 1998 to Energold Mining Ltd., with the Company
maintaining certain royalty interests on several properties.
BRIGGS/PANAMINT PROPERTIES
Outside the Briggs Mine, the Company has defined several advanced
stage exploration targets within its 17,000 acre claim block. The Briggs gold
deposit is hosted by Precambrian quartz and amphibolite gneisses that have been
severally deformed by faults of Tertiary age. High-angle faults and shear zones
have acted as vertical conduits that channeled gold-bearing hydrothermal fluids
upwards into a series of stacked low-angle faults. Since the discovery of the
Briggs gold deposit, the Company had developed a detailed geological
understanding of this deposit type. Using this knowledge, the Company has
identified significant gold mineralization within the Briggs claim block
extending for 12 miles along the western flank of the Panamint Mountain Range.
Areas identified within this block (from south to north) with indicated
potential to host gold mineralization include Goldtooth, Briggs, North Briggs,
Jackson, Cecil R, Pleasant Canyon, and Jackpot. (See "Item 2 - Properties -
Briggs Project - Development" for a discussion of Goldtooth and North Briggs).
In 1991 considerable drilling was conducted on the Goldtooth, Jackson and Cecil
R areas. Access to many parts of the claim block for drilling was severely
hampered by the presence of Wilderness Study Areas. In 1994 the WSA designation
was removed from the entire claim block.
Several areas identified as drill targets in the Pleasant Canyon and
Jackpot areas were drilled in 1997. This drilling resulted in the interception
of ore-grade gold mineralization in six widely spaced drill holes in the
Pleasant Canyon area. The gold mineralization appears to occur as two horizons
that can be traced from the surface to a depth of at least 535 feet below the
surface. A reconnaissance drilling program was also conducted at the Jackson
prospect. Geology of the Jackson target is similar to the Briggs Mine. The
drilling at Jackson intercepted potentially ore-grade gold mineralization that
appears to trend northward from the area of drilling. The Company and other
companies have drilled reverse circulation drill holes at Cecil R. Based on
this drilling, 2.2 million tons of mineralized rock containing 84,000 ounces of
gold with an average grade of 0.038 ounce of gold per ton has been identified.
The resource is open in three directions, and no wide stepout drilling was
initially done because of a former WSA restriction.
The Company has conducted reconnaissance and detailed mapping and
geochemical sampling of nearly the entire claim block. An aerial geophysical
program was conducted across the entire claim block in 1996 and was followed up
with ground reconnaissance in 1997. The geophysical and geochemical data will
be used to assist further exploration for concealed gold deposits on the
property.
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MONTANA PROPERTIES
The Company owns approximately 900,000 acres of fee simple and fee
mineral rights in western Montana. The fee mineral rights underlie surface
rights owned by other parties. In March 1995, the Company entered into an
Exploration Agreement with Option to Acquire Title Agreement with BHP Minerals
International Exploration Inc. (BHP) to explore the Company's 900,000 acre
holding in western Montana. The Agreement allowed BHP the option to acquire an
undivided 50% ownership in the property as to gold and an undivided 51%
ownership for all other minerals (except industrial minerals) by expending at
least $2.5 million on the property over a six-year period and making payments of
$25,000 per year to the Company. BHP also had the option to acquire an
additional 1% ownership in gold properties by paying one million dollars to the
Company.
From 1995 through 1998, BHP expended $1.4 million on reconnaissance
exploration for base and precious metal targets and detailed exploration and
drill testing of several target areas. Although BHP's work discovered several
anomalous areas of mineralization favorable for stratabound or stockwork gold
deposits, the passage of I-137 led BHP to conclude that further work is not
justified. In March, 1999, BHP terminated its interest in the joint venture.
LATIN AMERICAN EXPLORATION
ARGENTINA
In February 1996, CR International Corporation (CRIC), a wholly-owned
subsidiary of the Company, entered into an exploration agreement with Phelps
Dodge Exploration de Argentina, S.A. (PDA), a wholly-owned subsidiary of Phelps
Dodge Corporation, on five CRIC properties in Chubut and Santa Cruz Provinces.
By funding $3.9 million in exploration expenditures over a six-year period, PDA
could earn a 50% interest in the properties.
In April 1996, PDA terminated its interest in the four CRIC properties
in Santa Cruz Province but continued to explore on the 724 square kilometer
Arroyo Cascada property in Chubut Province. The Arroyo Cascada property contains
strongly anomalous gold values in rocks, soils, and stream-sediments within an
altered volcanic pile, suggestive of a buried porphyry system with potential for
both gold and copper. PDA conducted soil geochemical sampling, geologic mapping,
induced polarization geophysical surveying and drilled five holes totaling 1024
meters at Arroyo Cascada during 1996. In 1996 PDA expended $383,638 on the
Arroyo Cascada property. In February 1997, PDA notified CRIC that it was
terminating the exploration agreement.
In July 1997, CRIC entered into an Exploration with Option to Joint
Venture letter agreement covering the Arroyo Cascada property with Puma Minerals
Corp. (Puma). By expending $2.0 million over four years on the property, Puma
had the right to enter into a joint venture with CRIC as operator with a 50%
participating interest. During 1997 and 1998, Puma conducted geochemical
sampling, geologic mapping, and drilled 11 exploration drillholes. Following
this work, Puma withdrew its option to earn an interest in the property in
October, 1998. Canyon is actively seeking a new joint venture partner.
In July 1997, CRIC entered into a Purchase and Sales Agreement with
Minera El Desquite S.A. (Minera) for its Aeropuerto Property. The agreement
initially required Minera to pay CRIC $2.0 million over five years and a 2.5%
net smelter return on any production from the property. In 1998, the purchase
terms were modified to lower the payments in the first three years, but increase
the total purchase price to $2.42 million. Minera, at any time, upon proper
notice, may terminate the agreement and its then remaining
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obligations, and relinquish its interest in the property. The Aeropuerto
property is an epithermal gold exploration prospect in highly altered volcanic
rocks.
PANAMA
The Company's wholly-owned subsidiary Canyon de Panama, S.A. was
formally granted the 10,594 hectare San Pedrito Concession in August, 1995. The
concession is located in central Panama about 150 kilometers west of Panama
City. The San Pedrito property covers most of the area between the Santa Rosa
open-pit, heap-leach gold mine (over one million ounces of gold) and a smaller
underground mine at Remance. Geologic mapping and geochemical sampling by the
Company on the property have identified gold-bearing alteration zones in
andesitic volcanic rocks. The geologic environment is similar to that at Santa
Rosa.
Work during 1996 consisted of detailed geologic mapping and geochemical
sampling over a several square kilometer anomaly defined during the 1995
program. This additional work has defined a coherent gold in soil and rock
anomaly associated with a hydrothermally altered zone.
No substantive work was undertaken in 1997 or 1998 at the San Pedrito
concession. The Company is actively seeking a joint venture partner to continue
the work at San Pedrito.
AFRICA EXPLORATION
GENERAL
In February 1994, the Company entered into an agreement with Africa
Mineral Resource Specialists Inc. (AMRS), a Colorado corporation, whereby the
Company would finance the exploration and acquisition of precious metal
properties in Africa and the AMRS staff would conduct certain
exploration/acquisition activities under the direction of the Company. To
conduct the business activities in Africa, a subsidiary company, Canyon
Resources Africa Ltd. (CRAL) was formed - of which the Company owns 90% and AMRS
owns 10%.
The Company is currently attempting to sell its African subsidiaries
and their underlying properties.
ETHIOPIA
On September 6, 1995, CRAL and the Ministry of Mines signed a
three-year Exploration License, renewable for two additional one-year terms on
the 60 square kilometer Megado-Serdo area. The Megado- Serdo Exploration License
required that CRAL spend at least $500,000 and complete an approved work program
during the first year. The second year expenditure requirement on an approved
work program was $750,000.
The Megado-Serdo area is within a greenstone belt of metamorphic rocks
of Proterozoic age. The property is located 10-15 kilometers southwest of the
large Lega Dembi gold mine owned and operated by the Adola Gold Mine Enterprise.
Government workers have conducted considerable exploration work and have
identified several areas of gold mineralization associated with quartz veins
within favorable schist horizons on the Megado-Serdo property and have conducted
trenching and limited drilling. Most of the streams draining the Megado-Serdo
area have had considerable placer mining activity. CRAL commenced a detailed
review and compilation of prior government work at Megado Serdo in September
1995, and conducted preliminary site studies in December 1995.
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Field work at Megado-Serdo during 1996 included building of access
road, line cutting, geochemical soil grid sampling of the entire license,
geological mapping and trenching. By year-end, 3,678 soil samples and 1,429
trench samples had been collected. In-fill sampling in gold anomalous areas also
commenced. In 1997 total exploration expenditures exceeded the second license
year requirement of $750,000. The work included approximately 2,375m of
trenching, 58 line km of induced polarization geophysical survey, 65 line km of
radiometric geophysical survey, and 1,005m of diamond core drilling.
In August 1994, CRAL also applied for an Exploration License on the 108
square kilometer Meleka- Abeba area located about 50 kilometers north of the
Lega Dembi mine in the northern end of the Adola Gold Belt. Stream sediment
geochemistry conducted by the government has identified numerous concentrations
of anomalous gold which have not been followed-up to date. Some artisanal placer
mining has recently been conducted within the application area. On March 26,
1996, the Meleka-Abeba Exploration License was issued.
Field work at Meleka-Abeba has included building of access roads, line
cutting, rock, soil, and stream sediment geochemical sampling, and geologic
mapping. The stream sediment sampling has greatly expanded the area of anomalous
gold in streams identified earlier by government workers. The first year of the
license required a minimum expenditure of $250,000 which was met and a
commitment was made to continue work into the second year of exploration which
required a $400,000 minimum expenditure. Field work at Meleka- Abeba during the
first year included building of access roads, line cutting, rock, soil, and
stream sediment geochemical sampling, and geologic mapping. In year two of the
license, this work led to a trenching program which discovered areas of strongly
anomalous gold mineralization in bedrock. In late 1997, a limited diamond core
drilling program was undertaken to test several areas for near surface bulk
mineable gold mineralization. Anomalous gold values were intercepted and
additional follow-up drilling is required.
On February 6, 1996, CRAL entered into a joint venture agreement with
JCI Limited (JCI), a large South African mining company, to finance gold
exploration on CRAL's Exploration Licenses and license applications in Ethiopia.
By funding $3.0 million in exploration expenditures on two licenses, JCI would
earn a 51% joint venture interest. The joint venture continued into 1998 at
which time JCI withdrew from both the Megado and Meleka-Abeba license areas.
In October, 1996, an application was submitted by the CRAL-JCI joint
venture for a Mineral Prospecting License in the Tendaho Graben area covering
1100 square kilometers which was subsequently issued. A Mineral Prospecting
License is valid for one year, after which portions of the area may be converted
to Exploration Licenses. The joint venture committed to spend a minimum of
$50,000 during the one year period and CRAL funded 49% of the costs. The joint
venture applied for an exploration license covering a portion of the Tendaho
Graben area and that application was approved.
During 1997, CRAL and JCI expended $1.3 million on the various
Ethiopian licenses and exploration activities. During 1998, $0.6 million was
expended on the various licenses and exploration activities.
ZIMBABWE
In September 1995, CRAL was granted Exclusive Prospecting Order (EPO)
#1005 covering an area of approximately 234 square kilometers to the east of the
town of Chegutu in north-central Zimbabwe. There has been recorded gold
production of more than 200,000 ounces from numerous small mines and prospects
within the EPO. In addition, there has been considerable unrecorded production
by artisanal miners and ancient mining by indigenous peoples. Numerous small
parcels within the EPO are held by others which represent earlier filed claims,
mainly in the areas of past production.
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The regional geology consists of low grade metamorphic mafic volcanic
rocks (greenstone) of Archean age which are intercalated with felsic volcanics
and banded iron formations. These rocks are cut by somewhat younger Archean
granites. Most of the prior gold production has been derived from either granite
or greenstone hosts adjacent to or on the granite-greenstone contact.
Mineralization is often related to major shear zones, parallel to, and within
the greenstone belt.
CRAL has completed a review of the known information on geology, land
ownership, past production and claimholders of record. In 1996 CRAL conducted
orientation geochemical studies within the EPO as well as geological and
geochemical evaluation of several of the inholding claims through option
agreements with the owners. In February, 1997, CRAL, signed a Heads of Agreement
with Cambrian Resources, N.L. (Cambrian), an Australian mining company. Under
the terms of the agreement Cambrian could earn a 40% interest in the property by
spending $240,000 on exploration by September 14, 1997. Cambrian could increase
their ownership to 55% by spending an additional $240,000 by December 30, 1999.
During 1997, Cambrian expended approximately $69,000 on the property,
principally related to geophysical surveys, sampling and assaying. In late 1998,
Cambrian withdrew from the venture.
TITLE TO PROPERTY
U.S. MINERAL PROPERTIES
The Company's U.S. mineral properties consist of fee mineral rights,
leases covering state and private lands, leases of unpatented mining claims, and
unpatented mining claims located or otherwise acquired by the Company. Many of
the Company's mining properties in the United States are unpatented mining
claims to which the Company has only possessory title. Because title to
unpatented mining claims is subject to inherent uncertainties, it is difficult
to determine conclusively ownership of such claims. These uncertainties relate
to such things as sufficiency of mineral discovery, proper posting and marking
of boundaries, and possible conflicts with other claims not determinable from
descriptions of record. Since a substantial portion of all mineral exploration,
development and mining in the United States now occurs on unpatented mining
claims, this uncertainty is inherent in the mining industry. In addition, in
order to retain title to an unpatented mining claim, a claim holder must have
met annual assessment work requirements ($100 per claim) through September 1,
1992, and must have complied with stringent state and federal regulations
pertaining to the filing of assessment work affidavits. Moreover, after
September 1, 1992, a claim holder must pay a maintenance fee to the United
States of $100 per claim per year for each assessment year instead of performing
assessment work. In addition, a payment of $100 per claim is required for each
new claim located. State law may, in some instances, still require performance
of assessment work.
The present status of the Company's unpatented mining claims located on
public lands of the U.S. allows the claimant the exclusive right to mine and
remove valuable minerals, such as precious and base metals and industrial
minerals, found therein, and also to use the surface of the land solely for
purposes related to mining and processing the mineral-bearing ores. However,
legal ownership of the land remains with the U.S. The Company remains at risk
that the claims may be forfeited either to the U.S. or to rival private
claimants due to failure to comply with statutory requirements as to location
and maintenance of the claims.
Because the Company believes that it has established the existence of
valuable mineral deposits in certain of its properties, and has maintained and
improved the claims in the manner required by law, it has sought to enhance its
rights in those properties by seeking issuance of mineral patents. In July of
1992, the Company caused four applications for mineral patent for the 20 lode
mining claims comprising the then-known ore reserves at the Briggs property to
be filed with the California State Office of the Bureau of Land Management
(BLM). On October 1, 1994, while the patent applications were pending, Congress
imposed a moratorium on accepting and processing mineral patent applications
within the Department of the Interior.
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26
Under the terms of the moratorium (as interpreted by the Secretary of the
Interior), and solely as a result of the inaction of the California State Office
prior to the time the moratorium became effective, the Secretary considers the
applications not to be exempt from the moratorium, and therefore will not allow
them to be processed while the moratorium remains in effect.
Before the Secretary's position on the applications was known, the
Company instituted litigation in U.S. District Court to attempt to force the
Secretary to construe the applications as exempt from the moratorium and to
diligently process all of them, either by granting patents or by contesting the
claims. However, the Court has declined to compel the Secretary to expedite
processing of the applications. That decision is presently being appealed, but
the Court's decision does not determine the validity of the claims, nor does it
directly affect the Company's basic ability to conduct mining operations on the
claims. The Company has no reason to believe that grounds exist for denial of
any of the patents when and if they are ultimately adjudicated. However, there
can be no assurance that such patents will be granted.
For the last several Congressional sessions, bills have been repeatedly
introduced in the U.S. Congress which would supplant or alter the provisions of
the Mining Law of 1872. As of March 1, 1999, no such bills have passed. If
enacted, such legislation could substantially increase the cost of holding
unpatented mining claims and could impair the ability of companies to develop
mineral resources on unpatented mining claims. Such bills have proposed, among
other things, to either eliminate or greatly limit the right to a mineral patent
and to impose a federal royalty on production from unpatented mining claims.
Although it is impossible to predict at this point what any legislated royalties
might be, enactment could adversely affect the potential for development of such
claims and the economics of existing operating mines on federal unpatented
mining claims. The Company's financial performance could therefore be affected
adversely by passage of such legislation.
The Company supports reasonable, rational changes to the Mining Law of
1872 and is currently active in industry efforts to work with Congress to
achieve responsible changes to mining law. Although the exact nature or timing
of any mining law changes cannot be predicted, enactment of any federal mining
law changes would not affect the Company's Kendall, McDonald, or Seven-Up Pete
projects, because these projects are not on federal lands. The Briggs project
and certain other exploration properties, however, do occur on federal mining
claims and could be materially affected by such legislation.
FOREIGN MINERAL PROPERTIES
In the countries outside the United States where the Company is
operating, the rights to minerals are vested with the government. Mineral rights
are granted by the government through concessions, licenses or leases. Often,
the earliest stage work is conducted under Reconnaissance or Prospecting Permits
which have a duration of one to two years and cover large areas. Exploration
Licenses or Concessions often will involve a considerably smaller area and will
have a duration of one to three years, often with the right to extend for one or
two additional years with a reduction of the size of the area with each renewal.
Exploration Licenses usually contain the right to convert to a Mining License or
Concession provided the Licensee adheres to the terms of the Exploration License
and has defined an economic mineral deposit. Mining Licenses are generally for a
term of 10 to 20 years or longer or for the economic life of the deposit.
Usually the Licensee must considerably reduce the size of the area held when
converting from an Exploration License to a Mining License.
Mineral Licenses generally have a land rental charge which varies from
a few cents to several dollars per hectare per year and increases from
Prospecting to Exploration to Mining Licenses. Some countries have no royalty
provisions on production from Mining Licenses, whereas others will charge
royalties varying from 1-5% of the value of the minerals produced. Several
countries require a free carried interest in a mining
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operation at levels of 10-20% equity participation, although most countries in
which the Company is working do not. A number of countries charge a tax of
10-20% on dividends which are remitted outside the country. Income tax rates
vary from 30-40% in the countries in which the Company is working. In several
countries the sole benefit, outside of land rental, that the country derives
from Mining Licenses is through collection of income tax.
LEASED PROPERTY
The Company leases approximately 4,300 square feet of office space at
14142 Denver West Parkway, Golden, Colorado 80401, under a lease which expires
July 31, 2001. Rent is presently $5,923 per month. The Company maintains storage
and/or facilities in Golden, Colorado; Lincoln, Montana; and Ridgecrest,
California, on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
CR KENDALL - VAN HAUR LAWSUIT
In May 1998, a plaintiff group including members of the Van Haur family
and the Van Haur family Ranch Trust (collectively "Plaintiffs") filed suit in
U.S. District Court in Montana against the Kendall Mine. The Plaintiffs operate
a farming and ranching enterprise approximately 1 1/2 to 2 miles downstream of
the Kendall Mine. Plaintiffs allege violation of their water rights and other
torts by the Kendall Mine and request unspecified damages and punitive damages.
The Company has filed a motion asking the court to dismiss the lawsuit and
believes that the lawsuit will be dismissed. In the event the lawsuit is not
dismissed, the Company believes the Plaintiffs' allegations are completely
without merit and that the Company will prevail in this matter.
CR KENDALL - WATER QUALITY NOTICE OF VIOLATION
On September 23, 1998, the DEQ issued a Notice of Violation and
Administrative Order alleging certain violations of Montana water quality laws.
DEQ proposed a penalty of $330,000 (since modified to $302,000) in connection
with the alleged violations. The Company believes: (1) that many of the
allegations are unfounded, and (2) the proposed fine is in violation of Montana
statutes because it fails to consider certain mandatory mitigating factors. The
Company is negotiating the proposed fine with the DEQ and will vigorously defend
itself in court if a satisfactory resolution cannot be reached with the
administrative agency.
MCDONALD GOLD PROJECT - MONTANA DEPARTMENT OF NATURAL RESOURCES
METALIFEROUS MINERAL LEASES
On September 24, 1998, the Montana Department of Natural Resources
(DNRC), the entity that administers state mineral leases, unilaterally decided
to cancel the permitting extension of the 10-year lease term of the state leases
that pertain to the McDonald Gold Project. This was provoked by Canyon's
inability to continue permitting at McDonald due to the anti-cyanide initiative,
I-137, and would require the Company, after a period of approximately seventeen
months, to commence paying a delay rental of $150,000 per month in order to
maintain the leases. The Company has challenged the DNRC's action in Montana
District Court and believes it will prevail in this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of security holders in the last
quarter of 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on The American Stock Exchange
(AMEX) under the symbol CAU. Canyon's common stock was first included on the
National Association of Securities Dealers Automated Quotation System (NASDAQ)
on February 9, 1986, following the completion of the Company's initial public
offering and on the NASDAQ National Market on May 15, 1990. Canyon subsequently
moved to AMEX on August 19, 1996. The following table reflects the high and low
prices for the Company's common stock during 1998 and 1997. There are currently
no trading warrants.
COMMON STOCK
-------------------
High Low
----- -----
1998
Fourth Quarter $0.63 $0.25
Third Quarter $0.75 $0.19
Second Quarter $1.31 $0.63
First Quarter $1.19 $0.63
1997
Fourth Quarter $2.88 $1.00
Third Quarter $2.88 $1.75
Second Quarter $3.38 $2.31
First Quarter $3.44 $2.25
On March 1, 1999, the high and low prices for the Company's common
stock were $0.22 and $0.19, respectively.
As of March 1, 1999, there were approximately 1,362 holders of record
of the Company's common stock. The number of shareholders of the Company who
beneficially own shares in nominee or "street" name or through similar
arrangements is estimated by the Company to be approximately 6,500. As of March
1, 1999, there were 15 holders of record of non-trading warrants to purchase
common stock.
As of March 1, 1999, there were outstanding; a) 46,137,074 shares of
common stock; b) 2,595,349 warrants to purchase common stock; and c) 1,960,500
employee and non-qualified stock options to purchase common stock.
DIVIDENDS
For the foreseeable future, it is anticipated that the Company will use
any earnings to finance its growth and that dividends will not be paid to
shareholders. Further, pursuant to an agreement executed by the Company on
behalf of its wholly-owned subsidiary, CR Briggs Corporation, in connection with
a loan for the Briggs Mine, the Company has agreed to maintain certain levels of
working capital, tangible net worth, and leverage ratios which could restrict
the payment of dividends where such payment would result in a failure to
maintain such levels. Similarly, CR Briggs Corporation is prohibited from
repaying the Company for
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advances or from paying dividends to the Company from the Briggs Mine cash flow
unless certain conditions relating to the financial performance of the Briggs
Mine are met.
SALE OF UNREGISTERED SECURITIES
On October 14, 1998, the Company issued 30,000 shares of its $0.01 par
value common stock bearing a restrictive legend in a private placement to
Kennecott Minerals Company, at $0.50 per share. The securities issued to
Kennecott Minerals Company, a sophisticated investor, were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected information regarding the
Company's financial condition and results of operations over the past five
years.
DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
SUMMARY OF CONSOLIDATED
BALANCE SHEETS
Working Capital $(14,336,000) $ 2,581,200 $ 6,460,600 $ 26,323,200 $ 14,953,000
Current Assets 13,583,900 13,514,300 12,286,500 28,922,700 18,318,100
Total Assets 81,871,700 97,282,100 84,384,300 72,424,200 52,187,600
Current Liabilities 27,919,900 10,933,100 5,825,900 2,599,500 3,365,100
Long-term Obligations 8,652,900 31,310,500 30,117,800 49,754,200 23,468,900
Total Liabilities 36,572,800 42,243,600 35,943,700 52,353,700 26,834,000
Common Stockholders' Equity 45,298,900 55,038,500 48,440,600 20,070,500 25,353,600
SUMMARY OF CONSOLIDATED
STATEMENTS OF OPERATIONS
Sales $ 35,246,600 $ 28,890,300 $ 4,857,000 $ 9,006,600 $ 19,580,200
(Loss) Before Extraordinary Items
and Cumulative Effect of Changes
in Accounting Principles (2,849,300) (5,022,300) (7,114,900) (6,143,200) (337,700)
Net (Loss) (1) (12,058,900) (5,022,300) (7,114,900) (6,143,200) (337,700)
Net (Loss) Per Share (2)
Basic and Diluted (3) (0.26) (0.13) (0.21) (0.24) (0.01)
(1) The Company changed its methods of accounting for exploration
costs on unproven properties and accounting for costs of
start-up activities in 1998. See Note 4 to Consolidated
Financial Statements.
(2) The Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS128), Earnings per Share, in 1997. All
prior periods have been restated to conform with the
provisions of SFAS128.
(3) Potential common shares would be antidilutive as the Company
recorded net losses over the five year period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The matters discussed in this report on Form 10-K, when not historical
matters, are forward-looking statements that involve a number of risks and
uncertainties that could cause actual results to differ materially from
projected results. Such factors include, among others, the speculative nature of
mineral exploration, commodity prices, production and reserve estimates,
environmental and government regulations, availability of financing, force
majeure events, and other risk factors as described from time to time in the
Company's filings with the Securities and Exchange Commission. Many of these
factors are beyond the Company's ability to control or predict. The Company
disclaims any intent or obligation to update its forward-looking statements,
whether as a result of receiving new information, the occurrence of future
events, or otherwise.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
The Company recorded a loss before extraordinary item and cumulative
effect of changes in accounting principles of $2,849,300, or $0.06 per share,
and a net loss of $12,058,900, or $0.26 per share, on revenues of $35,246,600 in
1998. This compares to a net loss of $5,022,300, or $0.13 per share, on revenues
of $28,890,300 in 1997.
In May 1998, the Briggs Mine loan facility was restructured. As part of
the restructuring, the Company liquidated its hedge position for all forward
contracts with settlement dates beyond June 30, 1998. The liquidation resulted
in proceeds of $11.1 million which were used to prepay in full the then cash
loans outstanding of $8.6 million. As a result of the prepayment, unamortized
deferred financing costs of $281,500 allocated to the cash loans were expensed
in the second quarter of 1998. This amount is shown as an extraordinary item on
the Statement of Operations for 1998.
In the second quarter of 1998, the Company changed its method of
accounting for exploration costs on unproven properties from capitalizing all
expenditures to expensing all costs, other than acquisition costs, prior to the
establishment of proven and probable reserves. This will bring the Company's
accounting method in accordance with the predominant practice in the US mining
industry and will better reflect operating income and cash flow. The $5,625,400
cumulative effect of the change on prior years is included in the loss for 1998.
The effect of the change on 1998 was to increase the loss before extraordinary
item and cumulative effect of a change in accounting principle by $408,600, or
$0.01 per share, and the net loss by $6,034,000 or $0.13 per share.
During the third quarter of 1998, the Company recognized a gain of
$919,700 relating to a partial prepayment of the Briggs Mine gold loan.
Utilizing proceeds of approximately $2.5 million remaining from the May 1998
hedge liquidation, the Company repaid 8,869 ounces of principal by open market
purchase at $284.35 per ounce with a corresponding reduction in debt at $388.05
per ounce.
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In the fourth quarter of 1998, the Company elected early adoption of
Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities
(SOP 98-5). SOP 98-5 is otherwise effective for financial statements for fiscal
years beginning after December 15, 1998 and requires costs of start-up
activities and organization costs to be expensed as incurred. The $3,302,700
cumulative effect of the change on prior years is included in the loss for 1998.
The effect of the change on 1998 was to decrease the loss before extraordinary
item and cumulative effect of a change in accounting principle by $751,200, or
$0.02 per share, and to increase the net loss by $2,551,500, or $0.06 per share.
On December 31, 1998, the Company completed the sale of its industrial
minerals assets to an investment group. (See Note 17 to the Consolidated
Financial Statements). The Company recorded a loss on asset disposals of
$849,100 in connection with the sale.
During 1998, the Company sold 79,303 ounces of gold and 21,500 ounces
of silver at an average realized price of $375 per equivalent gold ounce. During
1997, the Company sold 68,436 ounces of gold and 18,500 ounces of silver at an
average realized price of $402 per equivalent gold ounce. This total includes
the sale of 8,150 ounces of gold during the first two months of 1997 which was
credited against capitalized development costs at the Briggs Mine.
The following table summarizes the Company's gold deliveries and
revenues in 1998 and 1997:
1998 1997
AVERAGE AVERAGE
GOLD PRICE REVENUE GOLD PRICE REVENUE
OUNCES PER OZ. $000'S OUNCES PER OZ. $000'S
------ ------- ------- ------ ------- -------
Deliveries
Forwards 56,600 $ 392 $22,176 58,350 $ 403 $23,490
Put options 4,200 $ 379 1,590 3,600 $ 380 1,368
Spot sales 16,409 $ 298 4,891 4,875 $ 326 1,572
Gold loan 2,094 $ 388 813 1,611 $ 388 625
------ ------- ------- -------
79,303 $ 372 29,470 68,436 $ 395 27,055
Other transactions
Silver proceeds -- 114 -- 97
Other hedging gains -- 190 -- 339
------ ------- ------- -------
79,303 $ 375 $29,774 68,436 $ 402 $27,491
As a result of the Company's hedging programs, additional revenues of
$6,287,000 and $4,823,700 in 1998 and 1997, respectively, were recognized
relative to spot prices in effect on the settlement dates. The New York
Commodity Exchange (COMEX) gold prices averaged $294 per ounce in 1998 and $331
per ounce in 1997. In 1998, revenue from the sale of industrial mineral products
increased 17% from the prior year.
All of the Company's revenues in 1998 and 1997 were from domestic activities.
Cost of sales was $26.3 million in 1998 compared to $21.4 million in
1997, reflecting the impact of the Briggs Mine operating at commercial
production levels for all of 1998. Cost of sales includes all direct and
indirect costs of mining, crushing, processing, and overhead expenses of the
Company's production operations, including provisions for estimated site
restoration costs accrued on a units-of-production basis.
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Per ounce cost of gold production at the Briggs Mine as computed under
the Gold Institute's Production Cost Standard, was as follows:
PER OUNCE
--------------
1998 1997
---- ----
Cash Operating Cost (1) $278 $290
Total Cash Costs (2) $284 $297
Total Production Costs (3) $368 $383
(1) As per cost of sales description above, excluding royalties and
accruals for site restoration.
(2) Cash operating cost plus
royalties.
(3) Total cash costs plus depreciation, depletion, amortization and
accruals for site restoration.
The lower per ounce costs in 1998 are attributable to higher production
levels, which was principally a result of a 23% improvement in crusher
throughput in the current year. In late 1997 and early 1998, the original design
tertiary stage vertical shaft impact crushers (VSI's) were removed from service
and replaced with more efficient cone crushers. In connection with the removal,
the Company adjusted its carrying value of the VSI's to fair market value during
the fourth quarter of 1997, resulting in an impairment of $215,900.
In 1998, the fair market value was further reduced by $19,700.
Depreciation, depletion and amortization was higher in 1998 due to
higher production at the Briggs Mine.
Exploration costs in 1998 of $0.6 million were $0.4 million higher than
in 1997, principally a result of the Company's change in the method of
accounting for exploration costs on unproven properties. The Company's
abandonments of $0.3 million in 1997 relate to costs associated with the
Cahuilla property, located in Imperial County, California.
During the fourth quarter of 1997, the Company recorded a charge of
$2.6 million for site restoration based on an update to the anticipated scope of
work remaining at the Kendall Mine.
Interest income was lower in the current year due to lower cash
balances. Interest expense was not materially different in 1998 as compared to
1997.
The Company executed an agreement during the second quarter of 1997 to
sell the Mountain View property in Nevada for $3.0 million, payable over a
twenty-four month period and, until the purchase price is paid in full, an
aggregate work commitment of $1,250,000. At any time, the buyer, upon proper
notice, could terminate the agreement and its then remaining obligations, and
relinquish its interest in the property. Due to the contingent nature of the
transaction, gain was recognized only upon receipt of cash in excess of basis.
During the third quarter of 1998, the buyer relinquished its interest in the
property. The Company subsequently returned the property to the underlying
lessors. No gain or loss occurred as a result of the property relinquishment. In
1997, the Company recorded a gain of $229,100 in connection with payments
received in the initial year of the agreement.
The Company executed an agreement during the third quarter of 1997 to
sell the Aeropuerto property in Chubut Province, Argentina for $2.0 million,
payable over a sixty month period. At any time, the buyer, upon proper notice,
may terminate the agreement and its then remaining obligations, and relinquish
its interest in the property. Due to the contingent nature of the transaction,
gain will be recognized only upon receipt of
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33
cash in excess of basis over the sixty month period. Accordingly, the Company
recorded a gain of $70,100 during 1998 and $42,400 during 1997.
There was no current or deferred provision for income taxes during 1998
or 1997. Additionally, although the Company maintains significant deferred tax
assets, principally in the form of operating loss carryforwards, the Company has
not recorded a net deferred tax asset in either 1998 or 1997 due to an
assessment of the "more likely than not" realization criteria required by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS
130 is designed to report a measure of all changes in equity of an enterprise
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. Besides net
income, other comprehensive income includes foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. The Company has no items of other
comprehensive income in any period presented in its financial statements.
The provisions of Statement of Financial Accounting Standards No. 131
(SFAS 131), Disclosures about Segments of an Enterprise and Related Information,
became effective for fiscal years beginning after December 15, 1997. SFAS 131
establishes standards for the way that public business enterprises determine
operating segments and report information about those segments in annual
financial statements. SFAS 131 also requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS 131 further establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company does not presently have separate operating segments which would
require the disclosures prescribed by SFAS 131.
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS128), Earnings per Share, in 1997. SFAS128's objective is to simplify the
computation of earnings per share (EPS) and to make the US standard more
compatible with that of other countries and the International Accounting
Standards Committee. SFAS128 supercedes APB Opinion 15, replacing the
presentation of "primary" and "fully diluted" EPS with "basic" and "diluted"
EPS. Basic EPS is computed by dividing income available to common shareholders
(net income less any dividends declared on preferred stock and any dividends
accumulated on cumulative preferred stock) by the weighted average number of
common shares outstanding. Diluted EPS requires an adjustment to the denominator
to include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. The numerator
is adjusted to add back any convertible preferred dividends and the after-tax
amount of interest recognized with any convertible debt. As the Company reported
net losses in 1998 and 1997, inclusion of potential common shares would have an
antidilutive effect on per share amounts. Accordingly, the Company's basic and
diluted EPS computations are the same for 1998 and 1997. At December 31, 1998
and 1997, respectively, there were potential common shares outstanding of
4,889,000 and 5,106,500, respectively.
The Company measures compensation cost for stock-based compensation as
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. See
Note 20 to the Consolidated Financial Statements for pro forma disclosures of
net income and earnings per share as if the fair value based method had been
applied as prescribed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation.
Inflation did not have a material impact on operations in 1998 or 1997.
Management of the Company does not anticipate that inflation will have a
significant impact on continuing operations.
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1997 COMPARED TO 1996
The Company recorded a net loss of $5.0 million, or $0.13 per share, on
revenues of $28.9 million in 1997, compared to a net loss of $7.1 million, or
$0.21 per share, on revenues of $4.9 million in 1996. Although the 1997 results
reflect an improvement over 1996, due principally to the attainment of
commercial production at the Briggs Mine in March 1997, 1997 was also impacted
by a provision for site restoration at the Kendall Mine, higher interest
expense, and lower interest income.
During 1997, the Company sold 68,436 ounces of gold and 18,500 ounces
of silver from its Briggs Mine at an average realized price of $402 per
equivalent gold ounce. This total includes the sale of 8,150 ounces of gold
during the first two months of 1997 which was credited against capitalized
development costs. During 1996, the Company sold 3,269 ounces of gold and 2,308
ounces of silver from the Kendall Mine at an average realized price of $392 per
equivalent gold ounce and 1,500 ounces of gold from the Briggs Mine at an
average realized price of $406 per ounce. Proceeds from sales at the Briggs Mine
in 1996 were credited against capitalized development costs.
The following table summarizes the Company's gold deliveries and
revenues in 1997 and 1996:
1997 1996
AVERAGE AVERAGE
GOLD PRICE REVENUE GOLD PRICE REVENUE
OUNCES PER OZ. $000'S OUNCES PER OZ. $000'S
------ -------- ------- ------ ------- -------
Deliveries
Forwards 58,350 $ 403 $23,490 1,500 $ 398 $ 597
Put options 3,600 $ 380 1,368 -- -- --
Spot sales 4,875 $ 326 1,572 3,269 $ 388 1,270
Gold loan 1,611 $ 388 625 -- -- --
------ ------- ------- -------
68,436 $ 395 27,055 4,769 $ 391 1,867
Other transactions
Silver proceeds -- -- 97 -- -- 12
Other hedging gains -- -- 339 -- -- 12
------ ------- ------- -------
68,436 $ 402 $27,491 4,769 $ 397 $ 1,891
As a result of the Company's hedging programs, additional revenues of
$4,823,700 and $56,100 in 1997 and 1996, respectively, were recognized relative
to spot prices in effect on the settlement dates. The New York Commodity
Exchange (COMEX) gold prices averaged $331 per ounce in 1997 and $388 per ounce
in 1996. In 1997, revenue from the sale of industrial mineral products increased
31% and per ton prices increased 5% from the prior year. All of the Company's
revenues in 1997 and 1996 were from domestic activities.
Cost of sales was $21.4 million in 1997 compared to $4.4 million in
1996, reflecting the impact of the Briggs Mine attaining commercial production
levels. Cost of sales includes all direct and indirect costs of mining,
crushing, processing, and overhead expenses of the Company's production
operations, including provisions for estimated site restoration costs accrued on
a units-of-production basis.
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Per ounce cost of gold production at the Briggs Mine in 1997, as
computed under the Gold Institute's Production Cost Standard, was as follows:
Per Ounce
---------
Cash Operating Cost (1) $290
Total Cash Costs (2) $297
Total Production Costs (3) $383
(1) As per cost of sales description above, excluding royalties and
accruals for site restoration
(2) Cash operating cost plus
royalties
(3) Total cash costs plus depreciation, depletion, amortization and
accruals for site restoration
The Briggs Mine experienced higher costs and lower throughput than
expected during the year, principally relating to unsatisfactory performance of
the tertiary stage vertical shaft impact crushers (VSI's). These units were
replaced with three cone crushers in late 1997 and early 1998 with the objective
of significantly increasing tonnage throughput and lowering costs in 1998 and
onward. The Company adjusted its carrying value of the VSI's removed from
service to fair market value, resulting in a fourth quarter 1997 impairment of
$215,900.
Depreciation, depletion and amortization was higher in 1997 due to the
attainment of commercial production at the Briggs Mine.
Selling, general, and administrative costs of $3.3 million were not
materially different from the prior year ($3.4 million) nor were exploration
costs ($0.2 million in 1997 versus $0.3 million in 1996).
The Company's abandonments of $0.3 million in 1997 relate to costs
associated with the Cahuilla property, located in Imperial County, California.
During 1996, the Company wrote down its carrying value or abandoned certain
exploration properties by $2.4 million based upon a fourth quarter analysis of
available drilling results and other work performed by joint venture partners
and itself.
During the fourth quarter of 1997, the Company recorded a charge of
$2.6 million for site restoration based on an update to the anticipated scope of
work remaining at the Kendall Mine. In 1996, a comparable charge of $1.4 million
was recorded.
Interest income was lower in the current year due to lower cash
balances. Interest expense was higher in the current year due to the Briggs Mine
attaining commercial production levels (prior year interest was capitalized
during the mine's development and commissioning).
The Company executed an agreement during 1997 to sell the Mountain View
property in Nevada for $3.0 million, payable over a twenty-four month period
and, until the purchase price is paid in full, an aggregate work commitment of
$1.25 million. At any time, the buyer, upon proper notice, may terminate the
respective agreement and its then remaining obligations, and relinquish its
interest in the property. The Company also executed an agreement during 1997 to
sell the Aeropuerto property in Chubut Province, Argentina for $2.0 million,
payable over a sixty month period. At any time, the buyer, upon proper notice,
may terminate the agreement and its then remaining obligations, and relinquish
its interest in the property. Due to the contingent nature of the transactions,
gain will be recognized only upon receipt of cash in excess of bases over the
relevant periods. The Company recorded a gain of $0.3 million during 1997 in
connection with the contingent sales.
There was no current or deferred provision for income taxes during 1997
or 1996. Additionally, although the Company maintains significant deferred tax
assets, principally in the form of operating loss
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carryforwards, the Company has not recorded a net deferred tax asset in either
1997 or 1996 due to an assessment of the "more likely than not" realization
criteria required by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes.
Inflation did not have a material impact on operations in 1997 or 1996.
LIQUIDITY & CAPITAL RESOURCES
LIQUIDITY:
The Company's liquidity has been adversely impacted by a sustained
period of low gold prices and high debt service requirements. Moreover, the
Company was not in technical compliance with an operating cost covenant (as
defined) at the Briggs Mine as of December 31, 1998 and has been unable to
achieve resolution of the matter with the lenders to date. As a result, the
covenant breach constitutes an event of default and the lenders may, by notice
to the Company, terminate the commitment and declare all amounts immediately due
and payable. The Company is in continuing discussions with the lenders on this
matter, however, there can be no assurances that a satisfactory resolution can
be achieved nor that the lenders will not exercise any remedies available to
them during the intervening period. Accordingly, the Company has reclassified
all of the debt as current on its Balance Sheet at December 31, 1998, which
resulted in the breach of other covenants related to certain financial ratios
and reporting requirements. In addition, in March 1999, the Company received a
demand notice for an increase in collateral of approximately $1.2 million from
the Surety who issued certain bonds for reclamation obligations at the Briggs
Mine, Kendall Mine and McDonald Gold Project. All of these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The Company has curtailed all discretionary expenditures, is currently
attempting to sell its African properties, and has retained investment banking
counsel to assist in the evaluation of potential merger or other alliance
opportunities. There can be no assurances, however, that the Company will be
successful in this regard.
SUMMARY OF 1998 CASH FLOW:
The Company's cash and cash equivalents decreased $1.1 million during
1998 to $2.0 million at year-end. The decrease was a result of net cash provided
by operations of $11.2 million, $2.1 million of net cash provided by investing
activities, and $14.4 million of net cash used in financing activities.
OPERATING ACTIVITIES:
Operations provided $11.2 million of cash in 1998 as compared to
providing $0.7 million in 1997 and using $8.1 million in 1996. The current year
improvement in cash flow was principally a result of the Company liquidating
most of its gold hedge position in May, 1998, resulting in proceeds of $11.1
million. Operating cash flow in 1997 improved from 1996 due to commercial
production levels being attained at the Briggs Mine.
INVESTING ACTIVITIES:
Capital expenditures in 1998 totaled $4.5 million. Major components
included $4.0 million for permitting efforts on the McDonald Gold Project. $0.3
million for capital improvements at the Company's industrial minerals
facilities; and $0.2 million for miscellaneous projects at the Briggs Mine.
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Capital expenditures in 1997 totaled $19.4 million. Major components
included $7.6 million at the Briggs Mine for final construction, working capital
and development drilling; $8.1 million at the McDonald Gold Project which
included an initial payment of $5.0 million to purchase Phelps Dodge's interest
in the project and $3.0 million for ongoing permitting; $1.5 million of
equipment upgrades at the Company's industrial minerals facilities and $0.5
million to purchase the pumice mine that supplies the ore for its New Mexico
processing facility; and $1.7 million on exploration properties.
Capital expenditures in 1996 totaled $33.5 million. Major components
included $27.4 million for construction and development of the Briggs Mine
(financed by drawings under a loan facility); $1.8 million for the acquisition
of a pumice processing facility and subsequent capital improvements; $1.6
million for the Company's share of costs on the McDonald Project, principally
relating to permitting; $1.5 million on foreign exploration properties; $0.5
million at the Company's diatomite operations, with the remaining amount spent
on miscellaneous projects.
On December 31, 1998, the Company completed the sale of its industrial
minerals assets to an investment group for a purchase price of $6,475,000 less
certain working capital adjustments. The purchase price included consideration
of $475,000 which was used to pay a promissory note issued in 1997 in connection
with the Company's purchase of the pumice mine that supplies the ore for its New
Mexico processing facility.
FINANCING ACTIVITIES:
Common Stock Issues
On October 14, 1998, the Company issued 30,000 shares in a private
placement at $0.50 per share.
On January 30, 1998, the Company completed an equity financing under a
Shelf Registration which raised approximately $2.5 million ($2.3 million net of
expenses) through the sale of 2,490,000 shares of common stock.
On December 30, 1997, the Company completed an equity financing under a
Shelf Registration which raised $2.5 million ($2.2 million net of expenses)
through the sale of 2,510,000 shares of common stock.
On June 11, 1997, the Company completed an equity financing under a
Shelf Registration which raised $10.0 million ($9.1 million net of expenses)
through the sale of 3,400,000 shares of common stock. Warrants to purchase
278,182 shares of common stock at a price of $4.05 per share were issued to the
Company's underwriter in connection with the financing. The warrants will expire
on June 5, 2000.
During 1997, 165,300 incentive and non-qualified stock options were
exercised resulting in proceeds to the Company of $0.3 million.
On June 14, 1996, the Company gave notice to all holders of record that
its 6% Convertible Subordinated Notes in the then aggregate principal amount of
$21.1 million would be redeemed on July 12, 1996, by the issuance of common
stock, at a price equal to $3.31 per share. The Company subsequently issued
6,346,100 shares in July, 1996, in connection with the call for redemption.
During April and May of 1996, the Company received proceeds of $3.0
million in connection with the exercise of various warrants to purchase common
stock. The Company issued 878,100 shares of common stock as a result of the
warrant exercises.
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On March 26, 1996, the Company completed a private placement in the
amount of $12.1 million ($11.2 million net of expenses). The offering was
completed at a price of $3.00 per unit which included one share of common stock
(4,034,300 total shares) and one-half warrant (2,017,200 total warrants). Each
whole warrant entitles the holder to purchase one share of common stock at an
exercise price equal to $3.75 per share. A warrant to purchase 300,000 shares of
common stock was issued to the Company's underwriter and financial advisor at
the same terms and conditions. A warrant to purchase 15,000 shares of common
stock was exercised in March 1999 and the remaining warrants to purchase
2,302,167 shares of common stock expired on March 25, 1999. The Company filed a
Registration Statement under the Securities and Exchange Act of 1933 in respect
of the common shares, the warrants, and the common shares underlying the
warrants which was declared effective by the Securities and Exchange Commission
on May 14, 1996.
During 1996, 306,400 incentive and non-qualified stock options were
exercised resulting in proceeds to the Company of $0.3 million.
Credit Arrangements
Purchase of the McDonald Gold Project
On September 25, 1997, the Company, together with its wholly-owned
subsidiary CR Montana Corporation (CR Montana), purchased a 72.25% participating
interest and underlying assets in the Seven-Up Pete Venture (Venture) from CR
Montana's partner in the Venture, Phelps Dodge Corporation (Phelps Dodge). The
Company and its wholly owned subsidiary now own 100% of the Venture. The Venture
includes the McDonald Gold Project near Lincoln, Montana.
The Company made an initial payment of $5 million from its existing
cash balance as part of a total purchase price which will be no less than $100
million and no more than $150 million, assuming all applicable permits for the
McDonald Gold Project are obtained. (See separate caption, "McDonald Gold
Project, Anti-Cyanide Mining Initiative.") At present, Canyon is pursuing
various options with respect to the remaining purchase price obligation which
may include, amongst others, sale of equity, mergers, or joint venture
participation. If permits are obtained or construction commences on or before
the second anniversary of the closing, a further payment of at least $95 million
plus the product of $1,666,666 and the number of months between the first
anniversary date of the closing and the month in which permits are obtained or
construction commences but no more than $145 million will instead be made, based
on a price of $20 per mineable reserve ounce attributable to the former Phelps
Dodge ownership plus the product of $0.833 times the number of months between
the first anniversary date of the closing and the month in which permits are
obtained or construction commences. If permits are obtained or construction
commences after the second anniversary of the closing, a further payment of at
least $115 million but no more than $145 million will instead be made, based on
a price of $30 per mineable reserve ounce attributable to the former Phelps
Dodge ownership. If the aggregate payments have then not totaled $150 million, a
varying production payment will be made each quarter based on 72.25% of the
ounces produced on a sliding scale commensurate with the then gold price as
follows: 1) $0 per ounce if the gold price is less than or equal to $350.00 per
ounce; 2) $3 per ounce if the gold price is greater than $350.00 but less than
or equal to $375.00 per ounce; 3) $5 per ounce if the gold price is greater than
$375.00 but less than or equal to $400.00 per ounce; 4) $7 per ounce if the gold
price is greater than $400.00 but less than or equal to $425.00 per ounce; and
5) $10 per ounce if the gold price is greater than $425.00 per ounce. Production
payments will cease when the aggregate of all payments reach $150 million.
The purchase payments are collateralized only by the 72.25%
participating interest and underlying assets in the Venture transferred from
Phelps Dodge to the Company and CR Montana in this transaction, and the 50%
co-tenancy interest in certain real property also transferred to the Company and
CR Montana.
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Revolver
In October, 1997, the Company's wholly owned subsidiary, CR Minerals
Corporation (CR Minerals), obtained a one-year revolving credit line (Revolver)
with Norwest Bank Colorado, N.A. in an amount not to exceed the lesser of a
borrowing base or $600,000. The borrowing base is calculated on 70% of CR
Minerals' domestic accounts receivable not more than 90 days in age from date of
invoice. The Revolver's average interest rate was 9.0% and was fully paid down
and closed during the fourth quarter of 1998.
Pumice Mine Purchase
On December 31, 1997, CR Minerals purchased the pumice mine which
supplies the raw ore for its New Mexico processing facility from Western Mobile
Santa Fe, Inc. Total purchase price was $950,000, of which $475,000 was paid at
closing with the balance of $475,000 paid on December 29, 1998.
Equipment Financing
During 1997, the Company repaid its remaining obligation of $196,800 in
connection with a 1994 financing of certain mining equipment.
CR Briggs Loan Facility
On December 6, 1995, the Company's wholly-owned subsidiary, CR Briggs
Corporation, obtained a $34.0 million loan facility to finance the capital
requirements of mine construction and working capital for its Briggs Mine in
California. The Company is guaranteeing the loan obligations of CR Briggs
Corporation, and the loan facility is collateralized by a first mortgage lien on
the property, non-leased assets of CR Briggs Corporation, and a pledge of the
Company's stock in CR Briggs Corporation. The facility was provided by a
syndication of three banks, and includes three tranches; a $25 million gold
loan; a $5 million cash loan; and a $4 million cost overrun facility. Subject to
certain conditions, the Company has the right to convert loans of one type into
loans of another type. On December 27, 1995, drawing commenced on the facility
and $25.0 million principal in the form of a gold loan (monetized at $388.05 per
ounce, or 64,425 ounces) and $1.0 million principal as a dollar loan were drawn.
During 1996, an additional $4.0 million principal was drawn on the facility.
During 1997, the remaining $4.0 million was drawn.
In May 1998, the loan facility was restructured and included (i) the
modification of certain coverage ratios (as defined), (ii) a revision to the
amortization schedule for the gold loan, and (iii) the liquidation of the
Company's hedge position for all forward contracts with settlement dates beyond
June 30, 1998. The liquidation resulted in proceeds of $11.1 million which were
used to prepay in full the cash loans then outstanding of $8.6 million.
In August 1998, the loan facility was further amended as follows: (i) a
six month, $1 million credit line at LIBOR plus 2 3/8% was established for
working capital needs ($650,000 drawn at December 31, 1998); (ii) the Company
pledged the stock of its subsidiary, CR Minerals, as additional collateral for
the loan; (the Company subsequently sold the assets of CR Minerals and has
reserved $2.4 million of the proceeds for further debt payments) (iii) certain
proceeds from any additional asset sales the Company may undertake will be used
to reduce the principal balance on the gold loan; and (iv) the $2.5 million
remaining from the May, 1998 hedge liquidation was utilized for scheduled debt
service for the period ending September 30, 1998 (644 ounces of principal and
312 ounces of interest) and to further reduce the principal on the gold loan by
8,225 ounces.
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The following table summarizes principal and interest payments and
weighted average interest rates on the loan facility:
1998 1997 1996
---------- ---------- ----------
Principal payments
Gold loan
o Ounces 13,057 4,832 --
o Monetized amount $5,066,700 $1,875,000 --
Cash loans $8,700,000 $ 300,000 --
Interest payments
Gold loan
o Ounces 2,481 2,437 2,661
o Market value $ 730,700 $ 787,800 $1,023,300
Cash loans $ 390,900 $ 767,000 $ 364,200
Weighted average interest rates
Gold loan 3.5% 3.4% 4.1%
Cash loans 10.3% 10.2% 9.9%
The Company's debt (all current) at December 31, 1998, consists of a
gold loan in the amount of $18,058,400 (46,536 ounces monetized at $388.05 per
ounce) and a dollar based credit line with $650,000 outstanding. The Company has
reserved $2,400,000 from the sale of its industrial minerals assets to i)
pay-off the credit line amount of $650,000 and ii) pay-down $1,750,000 of the
gold loan in 1999. In January, 1999, the credit line amount of $650,000 was
paid-off. In February 1999, $1.0 million was used to purchase 3,451 ounces of
gold at a market price of $289.75 per ounce which was applied to the gold loan.
In April 1999, the remaining $750,000 was used to purchase 2,666 ounces of gold
at a market price of $281.30 per ounce which was applied to the gold loan.
Due to a covenant breach (see "Liquidity"), the lenders may, by notice
to the Company, terminate the commitment and declare all amounts immediately due
and payable. Absent the lenders calling the loan, repayment terms generally
require quarterly installments which include scheduled principal reductions and
a varying cash sweep amount equal to 30% of free cash flow (as defined) after
primary debt service. After funding certain reserve accounts (as defined), if
necessary, remaining cash flow is available to the Company, subject to further
restrictive conditions. These restrictions include assertions of no potential or
actual defaults at the time of transfer and to the frequency of such transfers.
CR Briggs Corporation and the Company are also subject to cross-default
provisions without the giving of notice in respect of other indebtedness and
agreements which would cause such indebtedness to become due prior to its
maturity.
As a condition of the loan, a portion of the Briggs Mine's future
production is hedged to ensure adequate cash flow for repayment of the
obligation. At December 31, 1998, approximately 46% of the Briggs Mine
production from current reserves was hedged as follows:
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OUNCES AVERAGE PRICE/OZ.
------- -----------------
Forward Contracts (1) 183,800 $307
Gold Loan 46,536 $388
-------
230,336 $323
(1) Short dated contracts of 30 days or less to take advantage of
higher near-term forward rates. Contracts not settled by delivery of
gold ounces will be rolled out at one-month intervals, increasing the
realized price by approximately $1.00 per month at current annualized
rates of approximately 4%.
Letters of Credit
Certain bonds have been issued aggregating $5.9 million for the
performance of reclamation obligations at the Briggs Mine, Kendall Mine and
McDonald Gold Project. A bank Letter of Credit in the amount of $2,118,000 has
been provided in favor of the Surety as partial collateral for such obligations,
and the Company has fully collateralized the Letter of Credit with cash. In
March 1999, the Company received a demand notice for an increase in collateral
of approximately $1.2 million from the Surety. The Letter of Credit will expire
no earlier than December 31, 1999, and, at the bank's option, may be renewed for
successive one-year periods. The amount on deposit as collateral for the Letter
of Credit is included as restricted cash on the Company's balance sheet at
December 31, 1998. Of the amount on deposit, $165,000 was funded in 1998,
$84,000 was funded in 1995 and $1,869,000 was funded in prior years in
connection with a separate collateralized Letter of Credit only for the Kendall
Mine.
In December 1996, $0.5 million previously held as collateral for a bank
Letter of Credit in connection with a first year work commitment was returned to
the Company. During 1996, the Company's joint venture partner posted a
replacement financial assurance of the obligation allowing the existing Letter
of Credit to be canceled.
OUTLOOK:
Operations
The Briggs Mine is expected to produce approximately 86,000 ounces in
1999 at cash operating costs between $265-$275 per ounce. Nominal capital
spending of $0.2 million is anticipated relating principally to condemnation
drilling for waste dumps and to commence the permitting effort for future mining
of reserves adjacent to the Briggs orebody. The Company's hedge position for
1999 is summarized as follows:
OUNCES AVERAGE PRICE/OZ.
------ -----------------
Forward Contracts(1) 82,940 $313
Gold Loan 3,060 $388
------
86,000 $316
(1) As of December 31, 1998, the Company's forward position consisted
of 183,800 ounces of short dated contracts of 30 days or less at an
average price of $307 per ounce. The Company has the opportunity to
deliver all of its 1999 production not otherwise reserved for gold loan
repayments at prices that would average approximately $313 per ounce
based on one-month rollouts of its opening position and annualized
forward rates of approximately 4%.
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The Company expects to spend approximately $1.0 million on reclamation
at Kendall during 1999 and a further $1.8 million beyond 1999 through mine
closure. The Company has accrued the expected reclamation costs at December 31,
1998, based upon its current estimate.
Expenditures at the McDonald Gold Project are expected to be less than
$0.5 million in 1999, principally related to maintaining its mineral leases in
good standing.
OTHER MATTERS:
McDonald Gold Project, Anti-Cyanide Mining Initiative
In November, 1998, the Montana electorate passed an anti-cyanide mining
initiative (I-137) by a vote of 52% to 48%. I-137 bans development of new gold
and silver mines and expansions to existing mines which use open-pit mining and
cyanide in the treatment and recovery process. For most of the campaign period,
mining companies were prevented from campaigning due to a previously passed
initiative (I-125) which prohibited campaign-expenditures by "for-profit"
entities. Ten days prior to the election, a federal judge declared the
prohibition "unconstitutional". The mining community has filed lawsuits against
I-137, based on (i) having been denied the opportunity to campaign due to the
effectiveness of I-125 until the last few days, and (ii) due process
considerations, in that I-137 results in a taking of property without any
compelling public policy interest, since environmental safety concerns are well
protected and monitored with existing laws and regulations. The Company's legal
counsel believes that it is likely that I-137 will be declared unconstitutional,
or at a minimum, be overturned by the courts.
Gold Prices and Hedging
The Company's revenues, earnings and cash flow are strongly influenced
by world gold prices, which fluctuate widely and over which the Company has no
control. The Company's strategy is to provide an acceptable floor price for a
portion of its production in order to meet minimum coverage ratios as required
by loan facilities while providing participation in potentially higher prices.
Production not subject to loan covenants has historically been sold at spot
prices. The Company's hedging program at Briggs consists of forwards, and a gold
loan with approximately 46% of reserves hedged at an average price of $323 per
ounce. The risks of hedging include opportunity risk by limiting unilateral
participation in upward prices; production risk associated with delivering
physical ounces against a forward commitment; and credit risk associated with
counterparties to the hedged transaction. The Company believes its production
risk is minimal, and furthermore has the flexibility to selectively extend
maturity dates, thereby postponing delivery against forward commitments. With
regard to credit risk, the Company uses only creditworthy counterparties and
does not anticipate any non-performance by such counterparties.
Year 2000 Issue
Many computer programs utilize a two digit format to identify the
applicable year. Without modification, any date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing, among other things, disruptions
to operations and inability to process financial transactions.
The Company is presently inventorying systems which utilize information
technology. Software that is not year 2000 compliant will be upgraded or
replaced as appropriate. The associated costs are not expected to be material.
The Company expects its information technology systems to be fully compliant by
June 30, 1999.
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43
The Company is currently in the data gathering phase with regard to
equipment used in its operations which may have embedded chip technology.
Equipment that is not year 2000 ready could fail causing a disruption to the
Company's operations. The Company expects to determine year 2000 compliance for
such equipment by May 31, 1999 and to complete remediation efforts by September
30, 1999. At this time, the Company does not have sufficient data to estimate
the cost of year 2000 compliance nor does it have a contingency plan in place
for its non-information technology systems.
The Company relies on third parties to supply certain materials,
utilities, transportation, and other services necessary for its business
operations. During the first quarter of 1999, the Company will initiate a
process to ascertain their stage of year 2000 readiness through questionnaires,
interviews and other means with the objective of determining such third parties'
readiness by April 30, 1999. As part of the Company's contingency planning,
alternate suppliers, where practical, will be identified to reduce the risks of
interruption due to third party failures.
Although the Company believes it has adequate resources and personnel
to complete its remediation efforts prior to December 31, 1999, the Company
remains at risk with respect to its ability to complete its own program and/or
to a failure by one or more of its third party suppliers to achieve year 2000
compliance within the required time frame.
Environmental Regulation
In 1995 the Montana State Legislature passed legislation which
streamlined the permitting process of new industrial projects by reorganizing
the several state agencies that had jurisdiction over environmental permitting
into one new central agency, the Department of Environmental Quality (DEQ). This
agency will be responsible for acting on an application for a Hard Rock Mining
Operating Permit in connection with a Plan of Operations filed by the Seven-Up
Pete Joint Venture for the McDonald Gold Project. This permit, as well as
several other local, state and federal permits, including a joint state and
federal Environmental Impact Statement (EIS), will be required before permits
can be issued. There are no assurances that all permits will be issued nor that,
in the event they are issued, such issuances will be timely, nor that conditions
contained in the permits will not be so onerous as to preclude construction and
operation of the project. Moreover, with the passage of I-137 in November, 1998,
the Company cannot presently proceed with permitting and development of the
McDonald Gold Project.
The Kendall Mine operates under permits granted by the DEQ. The DEQ
requires the Company to maintain a $1,869,000 Reclamation Bond to ensure
appropriate reclamation. The DEQ is currently reviewing the adequacy of the bond
amount and the Company anticipates that the DEQ will require a bond increase,
but cannot presently predict the amount of any such increase. Additionally,
although the DEQ has approved the Company's plans related to recontouring,
revegetation, drainage and dewatering, discussions of long-term water handling
and heap closure methods continue. The Company's estimate to achieve final mine
closure may be impacted by the outcome of these pending matters.
In September, 1998, the DEQ filed a complaint in District Court
alleging violations of the Montana Water Quality Act for unpermitted discharges
at the Kendall Mine. The DEQ initially proposed a civil penalty in the amount of
$330,000, which was subsequently modified to $302,000, in connection with the
complaint. The Company is currently preparing a response to the complaint and
believes the penalty as currently assessed is without substantial merit.
The Briggs Mine operates under permits granted by various agencies
including the U.S. Bureau of Land Management (BLM), Inyo County, the California
Department of Conservation, and the Lahontan Regional Water Quality Control
Board (Lahontan). These agencies have jointly required the Company to post a
reclamation bond in the amount of $3,030,000 to ensure appropriate reclamation.
Additionally, the
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44
Company was required by Lahontan to post a $1,010,000 bond to ensure adequate
funds to mitigate any "foreseeable release" of pollutants to state waters. Both
bonds are subject to annual review and adjustment.
Based upon current knowledge, the Company believes that it is in
material compliance with all applicable environmental laws and regulations as
currently promulgated. However, the exact nature of environmental control
problems, if any, which the Company may encounter in the future cannot be
predicted, primarily because of the increasing number, complexity and changing
character of environmental requirements that may be enacted or of the standards
being promulgated by federal and state authorities.
Federal Legislation
Legislation has been introduced in prior sessions of the United States
Congress to modify the requirements applicable to mining claims on federal lands
under the Mining Law of 1872. To date, no such legislation has been enacted. The
timing and exact nature of any mining law changes cannot presently be predicted,
however, the Company will continue its active role in industry efforts to work
with Congress to achieve responsible changes to mining law. The Company is also
continuing its present efforts to patent the Briggs claims into private
ownership in accordance with the provisions of currently applicable law.
Recently Issued Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). SFAS 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999 and establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that the Company recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. At this time, the Company has not determined the effects, if any,
that adopting SFAS 133 will have on its financial condition, liquidity or
results of operations.
Dividends
For the foreseeable future, it is anticipated that the Company will use
any earnings to finance its growth and that dividends will not be paid to
shareholders. Further, pursuant to an agreement executed by the Company on
behalf of its wholly owned subsidiary, CR Briggs Corporation, in connection with
a loan for the Briggs Mine, the Company has agreed to maintain certain levels of
working capital, tangible net worth, and leverage ratios which could restrict
the payment of dividends where such payment would result in a failure to
maintain such levels. Similarly, CR Briggs Corporation is prohibited from
repaying the Company for advances or from paying dividends to the Company from
the Briggs Mine cash flow unless certain conditions relating to the financial
performance of the Briggs Mine are met.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Prices
The Company's earnings and cash flow are significantly impacted by
changes in the market price of gold. Gold prices can fluctuate widely and are
affected by numerous factors, such as demand, production levels, economic
policies of central banks, and producer hedging. During the last five years, the
average annual market price has fluctuated between $294 per ounce and $388 per
ounce. Moreover, in late 1997 and early 1998, gold prices declined to their
lowest level in eighteen years.
The Company currently utilizes two types of commodity instruments to
protect the selling price of a portion of its anticipated production. At
December 31, 1998, approximately 46% of the recoverable reserves at the
Company's Briggs Mine was hedged through (i) short dated forward contracts
totaling 183,800 ounces
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45
at an average price of approximately $307 per ounce, and (ii) a commodity-based
loan totaling 46,536 ounces at a monetized price of $388.05 per ounce. With
regard to the forward contracts, the Company can selectively extend maturity
dates and has the opportunity to deliver all of its estimated 1999 gold
production not otherwise reserved for its commodity loan repayment at prices
that exceed the current market price of gold by an average of approximately $25
per ounce. However, for purposes of illustrating the potential impact of a
change in gold price on the Company's annual profitability and cash flow, if
only 75% of its estimated production was delivered against the forward contracts
and the commodity loan, a $10 change in the price of gold would have an impact
of approximately $0.2 million. Similarly, a hedge position of only 50% with a
$10 change in the price of gold would impact the Company's profitability and
cash flow by approximately $0.4 million. The Company's commodity-based loan was
established in December, 1995, by borrowing 64,425 ounces from certain
counterparties, selling the ounces in the marketplace at a price of $388.05 per
ounce, and using the proceeds of $25 million to develop and construct production
facilities at the Briggs Mine. (See Note 9(a) to the Company's Consolidated
Financial Statements for a complete discussion of the financing arrangements for
the Briggs Mine). As the gold is repaid from production at the Briggs Mine, the
Company records revenue at the monetized amount of $388.05 with a corresponding
reduction in debt. An implicit hedging gain or loss exists at the time of
repayment depending on whether the market price of gold at the repayment date is
below or above the monetized amount.
There are certain market risks associated with commodity instruments.
If the Company's counterparties fail to honor their contractual obligation to
purchase gold at agreed-upon prices, the Company may be exposed to market price
risk by having to sell gold in the open market at prevailing prices. Similarly,
if the Company fails to produce sufficient quantities of gold to meet its
forward commitments and commodity loan obligation, the Company would have to
purchase the shortfall in the open market at prevailing prices.
In May 1998, the Company liquidated a forward position that was
originally established in December, 1995, resulting in proceeds of $11.1
million. For the year ended December 31, 1998, $2.5 million of the gain was
recognized in operations based on the original terms of the forward contracts.
During 1999, $4.1 million of the gain will be recognized with the balance of
$4.5 million recognized in 2000.
At December 31, 1998, the mark to market value of the Company's forward
contracts was approximately $3.2 million. The fair value and carrying value of
the Company's commodity-based loan at December 31, 1998 was approximately $13.4
million and $18.1 million, respectively.
Interest Rates
At December 31, 1998, the Company's debt consisted of a commodity-based
(gold) loan. Interest rates for such loans are typically lower than dollar
denominated debt, as the cost of leasing gold from sources such as central banks
is relatively inexpensive (less than 2% per annum). A counterparty to a
commodity-based loan will add an applicable margin to its cost of funds for
purposes of establishing an interest rate to the producer. During 1998, 1997,
and 1996, the interest rate on the Company's gold loan averaged 3.5%, 3.4%, and
4.1%, respectively. The Company is required to have the rate periodically reset
for periods that it may choose which range in duration from one to six months.
Because of the historically low rates for gold-denominated debt, the Company is
not exposed to significant interest rate risk, as a change in the rate from 3.5%
to 4.5% would have an impact on annual earnings and cash flow of less than
$0.150 million, based on the outstanding loan amount of 46,536 ounces and
current gold prices of approximately $290 per ounce.
Foreign Currency
The price of gold is denominated in US dollars, and the Company's gold
production operations are in the United States. The Company conducts only a
minor amount of exploration activity in foreign countries and has minimal
foreign currency exposure.
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ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants...................................... 45
Consolidated Balance Sheets............................................ 46
Consolidated Statements of Operations.................................. 47
Consolidated Statement of Changes in Stockholders' Equity.............. 48
Consolidated Statements of Cash Flows.................................. 49
Notes to Consolidated Financial Statements............................. 51-70
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47
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Canyon Resources Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Canyon Resources Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 4 to the financial statements, the Company changed its
method of accounting for exploration costs on unproven properties and
accounting for costs of start-up activities.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's working capital deficit, debt covenant
violations and possible reclamation obligations raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
February 26, 1999, except for
Notes 1 and 9, as to which the date is March 31, 1999
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48
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997
------------ ------------
Cash and cash equivalents $ 1,985,700 $ 3,111,000
Restricted cash 4,887,200 2,316,300
Accounts receivable 173,800 746,700
Inventories 5,372,200 6,051,800
Prepaid and other assets 1,165,000 1,288,500
------------ ------------
Total current assets 13,583,900 13,514,300
Property and equipment, at cost
Mining claims and leases 24,508,100 26,463,800
Producing properties 51,124,700 60,616,800
Other 994,200 1,144,500
------------ ------------
76,627,000 88,225,100
Accumulated depreciation and depletion (11,639,500 (7,269,100)
------------ ------------
Net property and equipment 64,987,500 80,956,000
Other assets 3,300,300 2,811,800
------------ ------------
Total Assets $ 81,871,700 $ 97,282,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 3,134,300 $ 3,829,600
Notes payable - current 18,708,400 4,554,300
Accrued taxes, other than payroll and income 60,800 151,400
Accrued reclamation costs 964,000 1,441,200
Deferred income 4,090,700 --
Other current liabilities 961,700 956,600
------------ ------------
Total current liabilities 27,919,900 10,933,100
Notes payable - long term -- 28,055,000
Accrued reclamation costs 2,704,900 2,857,500
Deferred income 4,489,500 --
Other noncurrent liabilities 1,458,500 398,000
------------ ------------
Total Liabilities 36,572,800 42,243,600
------------ ------------
Commitments and contingencies (Notes 11, 12 and 13)
Common stock ($.01 par value) 100,000,000 shares authorized; issued and out-
standing: 46,137,100 at December 31, 1998 and 43,617,100 at December 31, 1997 461,400 436,200
Capital in excess of par value 95,293,500 92,999,400
Deficit (50,456,000) (38,397,100)
------------ ------------
Total Stockholders' Equity 45,298,900 55,038,500
------------ ------------
Total Liabilities and Stockholders' Equity $ 81,871,700 $ 97,282,100
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
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49
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1998 1997 1996
------------- ------------ ------------
REVENUE
Sales $ 35,246,600 $ 28,890,300 $ 4,857,000
------------- ------------ ------------
EXPENSES
Cost of sales 26,299,600 21,389,900 4,356,900
Depreciation, depletion, and amortization 6,783,600 5,207,100 262,300
Selling, general and administrative 3,274,200 3,242,500 3,425,800
Exploration costs 552,400 202,000 307,800
Abandonments and impairments of mineral properties -- 305,900 2,425,800
Provision for site restoration -- 2,634,900 1,398,800
Impairment of producing assets 19,700 215,900 --
------------- ------------ ------------
36,929,500 33,198,200 12,177,400
------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 196,900 375,600 1,095,500
Interest expense (1,504,100) (1,442,900) (846,200)
Gain on partial prepayment of gold loan 919,700 - --
Gain (loss) on asset disposals (771,500) 343,000 (4,000)
Other (7,400) 9,900 (39,800)
------------- ------------ ------------
(1,166,400) (714,400) 205,500
------------- ------------ ------------
Loss before extraordinary item and cumulative
effect of changes in accounting principles (2,849,300) (5,022,300) (7,114,900)
Extraordinary loss on debt prepayments (281,500) -- --
Cumulative effect of changes in accounting
principles (8,928,100) -- --
------------- ------------ ------------
Net loss ($12,058,900) ($5,022,300) ($7,114,900)
============= ============ ============
Basic and diluted loss per share:
Loss before extraordinary item and cumulative
effect of changes in accounting principles ($0.06) ($0.13) ($0.21)
Extraordinary loss on debt prepayments ($0.01) -- --
Cumulative effect of changes in accounting
principles ($0.19) -- --
------------- ------------ ------------
Net loss ($0.26) ($0.13) ($0.21)
============= ============ ============
Weighted average shares outstanding 46,114,600 39,821,900 33,275,500
============= ============ ============
Pro forma amounts assuming the discretionary change
in accounting principle is applied retroactively
Net loss -- ($6,553,300) ($6,396,500)
Basis and diluted per share amounts -- ($0.16) ($0.19)
The accompanying notes are an integral part of these consolidated
financial statements.
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50
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997, and 1996
Capital
Common Stock in excess
Shares Amount of par value Deficit
------------ ------------ ------------ ------------
Balances, December 31, 1995 25,793,300 $ 257,900 $ 46,072,500 ($26,259,900)
Issuance of stock and warrants 5,062,400 50,600 14,535,200 --
Exercise of stock options 272,900 2,700 319,700 --
Conversion of debentures 525,200 5,300 1,806,700 --
Redemption of debentures 5,849,800 58,500 18,706,300 --
Net loss -- -- -- (7,114,900)
------------ ------------ ------------ ------------
Balances, December 31, 1996 37,503,600 375,000 81,440,400 (33,374,800)
Issuance of stock and warrants 5,960,000 59,100 11,191,800 --
Exercise of stock options 153,500 2,100 367,200 --
Net loss -- -- -- (5,022,300)
------------ ------------ ------------ ------------
Balances, December 31, 1997 43,617,100 436,200 92,999,400 (38,397,100)
Issuance of stock 2,520,000 25,200 2,294,100 --
Net loss -- -- -- (12,058,900)
------------ ------------ ------------ ------------
Balances, December 31, 1998 46,137,100 $ 461,400 $ 95,293,500 ($50,456,000)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
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51
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net loss ($12,058,900) ($ 5,022,300) ($ 7,114,900)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Extraordinary loss on debt prepayments 281,500 -- --
Cumulative effect of changes in accounting principles 8,928,100 -- --
Depreciation, depletion, and amortization 6,783,600 5,207,100 262,300
Amortization of financing costs 209,900 228,600 154,500
Abandonments and impairments of mineral properties -- 305,900 2,425,800
Provision for site restoration -- 2,634,900 1,398,800
Impairment of producing assets 19,700 215,900 --
Provision for inventory obsolescence -- 266,500 --
(Gain) loss on disposal of assets 771,500 (343,000) 4,000
Other 50,000 (500) 23,300
Changes in assets and liabilities:
Decrease (increase) in receivables (317,700) (171,900) 91,100
Decrease (increase) in inventories 20,100 (2,224,800) (3,620,600)
Decrease (increase) in prepaid and other assets (1,256,400) (1,597,300) 18,900
Increase (decrease) in accounts payable and accrued liabilities (779,200) 2,255,500 (1,150,100)
Increase in deferred income 8,580,200 -- --
Increase (decrease) in other liabilities 45,000 (737,800) (613,600)
Increase in restricted cash (60,100) (309,100) --
------------ ------------ ------------
Total adjustments 23,276,200 5,730,000 (1,005,600)
------------ ------------ ------------
Net cash provided by (used in) operating activities 11,217,300 707,700 (8,120,500)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (4,464,800) (19,429,100) (33,458,400)
Proceeds on asset dispositions 6,587,500 373,600 45,300
Production proceeds during mine development and restricted cash -- 3,894,100 4,400
Other -- 4,000 20,000
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,122,700 (15,157,400) (33,388,700)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of stock 2,207,500 11,612,500 14,505,100
Proceeds from loans and restricted cash, net 1,204,000 4,296,100 27,259,500
Payments on debt (15,091,600) (2,371,800) (216,600)
Proceeds from asset sales reserved for debt payments (2,400,000) -- --
Payments on capital lease obligations (220,400) (157,200) (63,900)
Payments for debt issuance costs -- -- (187,700)
Receipts from escrow account 200 -- 2,000,100
Receipts from (payments to) collateralize letters of credit (165,000) -- 500,000
------------ ------------ ------------
Net cash provided by (used in) financing activities (14,465,300 13,379,600 43,796,500
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,125,300) (1,070,100) 2,287,300
Cash and cash equivalents, beginning of year 3,111,000 4,181,100 1,893,800
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,985,700 $ 3,111,000 $ 4,181,100
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
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52
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Supplemental disclosures of cash flow information:
1. The Company paid $1,366,800, $1,644,400, and $2,247,200 of interest during
1998, 1997, and 1996, respectively. Of the total payments, capitalized
interest during 1998, 1997, and 1996 was $0, $543,600, and $1,449,600,
respectively.
2. The Company paid no income taxes during 1998, 1997, and 1996.
Supplemental schedule of noncash investing and financing activities:
1. Capital lease obligations of $1,326,300, $97,600, and $379,000 were
incurred for equipment in 1998, 1997, and 1996, respectively.
2. The Company issued 50,000 shares of common stock which was valued at
$106,200 in connection with the termination of a previous agreement to
acquire an exploration property in 1997.
3. The Company executed a promissory note in the face amount of $475,000
($434,300 discounted) as partial consideration to acquire an asset in 1997.
4. Debentures in the principal amount of $1,812,000 were converted to 525,200
shares of common stock and $19,363,000 of principal was redeemed by the
Company into 5,849,800 shares of common stock during 1996.
5. The Company issued 150,000 shares of common stock which was valued at
$403,100 in exchange for a royalty interest during 1996.
6. Certain stock options were exercised and paid for by tendering shares
otherwise issuable in lieu of cash payment. Fair market value of the
shares tendered was $0, $39,900, and $101,200 during 1998, 1997, and 1996,
respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
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53
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND LIQUIDITY:
Canyon Resources Corporation (the Company) is a United States based
corporation involved in all phases of the mining business from exploration,
permitting, developing, operating and final closure of mining projects. The
Company has gold production operations in the western United States and
conducts exploration activities in search of additional mineral properties
(emphasizing precious metals) in the western United States and throughout Latin
America and Africa. The principal market for the Company's precious metals
products are European-based bullion trading concerns. Until December 31, 1998,
the Company also had industrial mineral production operations (diatomite and
pumice) in the Western United States (see Note 17).
The Company's financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and settlement of
liabilities and commitments in the ordinary course of business. The Company's
liquidity, however, has been adversely impacted by a sustained period of low
gold prices and high debt service requirements. Moreover, the Company was not
in technical compliance with an operating cost covenant (as defined) at the
Briggs Mine as of December 31, 1998 and has been unable to achieve resolution
of the matter with the lenders to date. As a result, the covenant breach
constitutes an event of default and the lenders may, by notice to the Company,
terminate the commitment and declare all amounts immediately due and payable.
The Company is in continuing discussions with the lenders on this matter,
however, there can be no assurances that a satisfactory resolution can be
achieved nor that the lenders will not exercise any remedies available to them
during the intervening period. Accordingly, the Company has reclassified all of
the debt as current on its Balance Sheet at December 31, 1998, which resulted
in the breach of other covenants related to certain financial ratios and
reporting requirements. In addition, in March 1999, the Company received a
demand notice for an increase in collateral of approximately $1.2 million from
the Surety who issued certain bonds for reclamation obligations at the Briggs
Mine, Kendall Mine and McDonald Gold Project. All of these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The Company has curtailed all discretionary expenditures, is currently
attempting to sell its African properties, and has retained investment banking
counsel to assist in the evaluation of potential merger or other alliance
opportunities. There can be no assurances, however, that the Company will be
successful in this regard.
2. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION: The consolidated financial statements of the Company
include the accounts of Canyon and its wholly-owned subsidiaries: CR Kendall
Corporation; CR Minerals Corporation; CR Briggs Corporation; CR Montana
Corporation; CR International Corporation; Canyon Resources (Chile) S.A.;
Canyon De Panama, S.A.; CR Brazil Corporation; and its 90% owned subsidiaries:
Canyon Resources Venezuela, C.A.; Canyon Resources Africa Ltd.; and Canyon
Resources Tanzania Limited. The Company
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54
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):
applied equity accounting principles for its 40% ownership in Minera
Hispaniola, S.A., a foreign corporation which was sold in 1998, and
proportionately consolidates its interests in undivided interest joint
ventures.
INTERCOMPANY BALANCES: All intercompany balances and transactions have been
eliminated.
PRIOR PERIOD RECLASSIFICATIONS: Certain prior period items have been
reclassified in the consolidated financial statements to conform with the
current year presentation.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include amounts which are
readily convertible into cash and which are not subject to significant risk
from changes in interest rates. The Company maintained at December 31, 1998 and
1997, a significant portion of its cash in two financial institutions.
RESTRICTED CASH: Cash held as collateral for letters of credit is classified
based on the expected expiration of such facilities. Cash held in trust and/or
restricted to specific uses is classified based on the expected timing of such
disbursements. See Note 5. The Company maintained its restricted cash at
December 31, 1998 and 1997 in two financial institutions.
INVENTORIES: Processed ores and metal-in-process are stated at the lower of
average cost or market. Materials and supplies are stated at cost.
DEFERRED MINING COSTS: The Company, in order to more closely match expenses and
revenues, capitalizes costs of overburden removal that are in excess of the
estimated average pit strip ratio (ratio of waste tons mined to ore tons mined)
over the pit life. When the actual strip ratio becomes less than the estimated
average pit strip ratio, these costs are expensed.
MINING CLAIMS AND LEASES: During 1998, the Company changed its method of
accounting for exploration costs on unproven properties from capitalizing all
expenditures to expensing all costs, other than acquisition costs, prior to the
establishment of proven and probable reserves (See Note 4). Gains or losses
resulting from the sale or abandonment of properties are included in
operations. Proceeds from sales of properties and earn-in arrangements in which
the Company has retained an economic interest are credited against property
costs and no gain is recognized until all costs have been fully recovered.
PRODUCING PROPERTIES AND EQUIPMENT: Acquisition and development costs
associated with properties brought into production are charged to operations
using the units-of-production method based on estimated recoverable reserves.
Production facilities and equipment are stated at cost and are amortized over
the estimated proven and probable recoverable reserves of the related property.
Vehicles and office equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives of three to five years.
Maintenance and repairs are charged to expense as incurred. Gains or losses on
dispositions are included in operations.
IMPAIRMENTS: The Company evaluates the carrying value of its properties and
equipment by applying the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. With respect to properties
with proven reserves, an impairment loss is recognized when the estimated
future cash flows (undiscounted
52
55
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):
and without interest) expected to result from the use of the asset are less
than the carrying amount of the asset. Measurement of the impairment loss is
based on discounted cash flows. Properties with unproven reserves are assessed
for impairment when changes in market conditions or other events occur and are
measured based on fair value.
SITE RESTORATION: Costs are estimated based primarily upon environmental and
regulatory requirements and are accrued and charged to expense over the
expected economic life of the operation using the units of production method
based upon proven and probable recoverable reserves. The accrual for site
restoration is classified based on the timing of expected expenditures. When an
operation is in the reclamation phase, the Company applies the provisions of
Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies.
REVENUE RECOGNITION: Revenue from the sale of gold and industrial minerals is
recognized when title passes to the buyer. Deferred income represents payments
received for the future delivery of mineral products to be mined. Upon
delivery, revenue is included in the Company's Statement of Operations.
DERIVATIVE COMMODITY INSTRUMENTS: The Company uses derivative commodity
instruments (gold loans, gold forward contracts, and put options) to manage
market risks associated with fluctuating gold prices. The Company does not hold
or issue derivative commodity instruments for trading purposes. Gold loans are
monetized at the original proceeds amount and are recognized into revenue at
the time of physical delivery of the metal. At any time that it is not probable
that the timing and amount of production will be sufficient to repay the gold
loan, or the cost of production exceeds the market price of the gold, the gold
loan is recorded at the higher of the original proceeds or the market value.
Costs or premiums, if any, and gains or losses related to changes in values of
other derivative commodity instruments are included in revenues when the
underlying production is delivered to meet the commitment, or at the originally
designated maturity dates in the event of early settlement of such instruments.
Cash flow resulting from hedge contracts is included in net cash provided by
operating activities on the statements of cash flows.
DEFERRED FINANCING COSTS: Costs incurred to obtain debt financing are
capitalized and amortized over the life of the debt facilities using the
effective interest method.
INTEREST CAPITALIZATION: Interest costs are capitalized as part of the
historical cost of facilities and equipment, if material.
EARNINGS PER SHARE: The Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS128), Earnings per Share in 1997 and all prior periods
have been restated. SFAS128's objective is to simplify the computation of
earnings per share (EPS) and to make the US standard more compatible with that
of other countries and the International Accounting Standards Committee.
SFAS128 supersedes APB Opinion 15, replacing the presentation of "primary" and
"fully diluted" EPS with "basic" and "diluted" EPS. Basic EPS is computed by
dividing income available to common shareholders (net income less any dividends
declared on preferred stock and any dividends accumulated on cumulative
preferred stock) by the weighted average number of common shares outstanding.
Diluted EPS requires an adjustment to the denominator to include the number of
additional common shares that would have been outstanding if dilutive potential
common shares had
53
56
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):
been issued. The numerator is adjusted to add back any convertible preferred
dividends and the after-tax amount of interest recognized with any convertible
debt. As the Company reported net losses in 1998, 1997, and 1996, inclusion of
potential common shares would have an antidilutive effect on per share amounts.
Accordingly, the Company's basic and diluted EPS computations are the same for
the periods presented. At December 31, 1998, 1997, and 1996, respectively,
there were potential common shares outstanding of 4,889,000, 5,106,500 and
4,582,200, respectively.
COMPREHENSIVE INCOME: Effective January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income. SFAS 130 is designed to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic events
of the period other than transactions with owners in their capacity as owners.
Besides net income, other comprehensive income includes foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. The Company has no items of
other comprehensive income in any period presented in the accompanying
financial statements.
4. CHANGES IN ACCOUNTING PRINCIPLES:
In the second quarter of 1998, the Company changed its method of
accounting for exploration costs on unproven properties from capitalizing all
expenditures to expensing all costs, other than acquisition costs, prior to the
establishment of proven and probable reserves. This will bring the Company's
accounting method in accordance with the predominant practice in the US mining
industry and will better reflect operating income and cash flow. The $5,625,400
cumulative effect of the change on prior years is included in the loss for
1998. The effect of the change on 1998 was to increase the loss before
extraordinary item and cumulative effect of changes in accounting principles by
$408,600, or $0.01 per share.
In the fourth quarter of 1998, the Company elected early adoption of
Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities
(SOP 98-5). SOP 98-5 is otherwise effective for financial statements for fiscal
years beginning after December 15, 1998 and requires costs of start-up
activities and organization costs to be expensed as incurred. The $3,302,700
cumulative effect of the change on prior years is included in the loss for
1998. The effect of the change on 1998 was to decrease the loss before
extraordinary item and cumulative effect of changes in accounting principles by
$751,200, or $0.02 per share.
54
57
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. RESTRICTED CASH:
Restricted cash consisted of the following at December 31:
1998 1997
---------- ----------
Collateral for Letter of Credit (a) $2,118,000 $1,953,000(1)
Proceeds from asset sales reserved for debt payments (b) 2,400,000 --
Unexpended proceeds from loan drawing (c) -- 54,000
Unexpended proceeds from gold sales (d) 369,200 309,100
Contingency account (e) -- 200
---------- ----------
Current portion $4,887,200 $2,316,300
Noncurrent portion 4,887,200 2,316,300
---------- ----------
$ -- $ --
========== ==========
(a) In connection with the issuance of certain bonds for the performance of
reclamation obligations at the Kendall Mine, Briggs Mine, and McDonald Gold
Project, a bank Letter of Credit has been provided in favor of the Surety as
partial collateral for such bond obligations. The Letter of Credit is fully
collateralized with cash. (See Note 13). The Letter of Credit will expire no
earlier than December 31, 1999. At the bank's option, the Letter of Credit may
be renewed for successive one-year periods.
(1) Kendall and Briggs Mines only
(b) In connection with the sale of the Company's industrial minerals assets on
December 31, 1998, 40% of the proceeds are required to be utilized for debt
reduction on the Briggs Mine loan facility.
(c) As described in Note 9(a), the loan proceeds are restricted solely for the
development of the Briggs Mine.
(d) The Briggs Mine loan facility requires all proceeds from gold sales to be
held in trust and disbursed from the collected credit balance in certain orders
of priority.
(e) As a condition precedent to securing the Briggs Mine loan facility (see
Note 9(a)), the Company transferred $2.0 million to an escrow account to be
held in reserve against construction cost overruns. Substantially all of these
funds were utilized in 1996 due to higher than anticipated construction costs
and working capital needs.
55
58
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INVENTORIES:
Inventories consisted of the following at December 31:
1998 1997
---------- ----------
Gold-in-process(a) $4,962,200 $4,997,900
Industrial Minerals -
in process(a) -- 413,200
Materials and supplies 410,000 640,700
---------- ----------
$5,372,200 $6,051,800
========== ==========
(a) Includes all direct and indirect costs of mining, crushing,
processing and mine site overhead expenses.
7. MINING CLAIMS AND LEASES:
The carrying value of the Company's mining claims and leases consists
of the following components at December 31:
1998 1997
---------- ----------
Mining Property:
McDonald $18,769,400 $16,646,600
Seven-Up Pete 5,175,000 --
Exploration Properties 563,700 9,817,200
----------- -----------
$24,508,100 $26,463,800
=========== ===========
Feasibility studies on the McDonald and Seven-Up Pete properties located in
Montana indicate sufficient mineable reserves that, with subsequent
development, would allow the Company to ultimately recover its carrying values
at December 31, 1998. (See Note 13.)
8. ASSET IMPAIRMENT:
In 1997, certain crushing components at the Briggs Mine were replaced.
The Company adjusted its carrying value of the items removed from service to
estimated fair market value during the fourth quarter of 1997, resulting in an
impairment of $215,900.
In 1996, the Company wrote down its carrying value for certain
exploration properties by $2.3 million based upon a fourth quarter analysis of
available drilling results and other work performed by joint venture partners
and itself.
56
59
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. NOTES PAYABLE:
Notes payable consisted of the following at:
December 31, December 31,
1998 1997
----------- -----------
Briggs Facility(a)
o Gold Loan $18,058,400 $23,125,000
o Cash Loans -- 8,700,000
o Credit Line 650,000 --
Norwest Revolver(b) -- 350,000
Western Mobile Note(c) -- 434,300
----------- -----------
$18,708,400 $32,609,300
Current portion(1) 18,708,400 4,554,300
----------- -----------
Notes Payable - Long Term $ -- $28,055,000
=========== ===========
(1) CR Briggs Corporation was not in technical compliance with an
operating cost covenant (as defined) as of December 31, 1998 and
has been unable to achieve resolution of the matter with the
lenders to date. As a result, the covenant breach constitutes an
event of default and the lenders may, by notice to CR Briggs
Corporation, terminate the commitment and declare all amounts
immediately due and payable. Accordingly, the Company has
reclassified all of the debt as current on its Balance Sheet at
December 31, 1998. CR Briggs Corporation and the Company are also
subject to cross-default provisions without the giving of notice
in respect of other indebtedness and agreements which would cause
such indebtedness to become due prior to its maturity.
(a) On December 6, 1995, the Company's wholly-owned subsidiary, CR Briggs
Corporation, obtained a $34.0 million loan facility to finance the
capital requirements of mine construction and working capital for its
Briggs Mine in California. The Company is guaranteeing the loan
obligations of CR Briggs Corporation, and the loan facility is
collateralized by a first mortgage lien on the property, non-leased
assets of CR Briggs Corporation, and a pledge of the Company's stock
in CR Briggs Corporation. The facility was provided by a syndication
of three banks, and includes three tranches; a $25 million gold loan;
a $5 million cash loan; and a $4 million cost overrun facility.
Subject to certain conditions, the Company has the right to convert
loans of one type into loans of another type. On December 27, 1995,
drawing commenced on the facility and $25.0 million principal in the
form of a gold loan (monetized at $388.05 per ounce, or 64,425 ounces)
and $1.0 million principal as a dollar loan were drawn. During 1996,
an additional $4.0 million principal was drawn on the facility. During
1997, the remaining $4.0 million was drawn.
In May 1998, the loan facility was restructured and included (i) the
modification of certain coverage ratios (as defined), (ii) a revision
to the amortization schedule for the gold loan, and (iii) the
liquidation of the Company's hedge position for all forward contracts
with settlement dates beyond June 30, 1998. The liquidation resulted
in proceeds of $11.1 million which were used to prepay in full the
cash loans then outstanding of $8.6 million. As a result of the
prepayment, unamortized deferred financing costs
57
60
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. NOTES PAYABLE, (CONTINUED):
of $281,500 allocated to the cash loans were expensed in the second
quarter of 1998. This amount is shown as an extraordinary item on the
Statement of Operations for the year ended December 31, 1998.
In August, 1998, the loan facility was further amended as follows: (i)
a six month, $1 million credit line at LIBOR plus 2 3/8% was
established for working capital needs ($650,000 drawn at December 31,
1998); (ii) the Company pledged the stock of its subsidiary, CR
Minerals, as additional collateral for the loan (the Company
subsequently sold the assets of CR Minerals and has reserved $2.4
million of the proceeds for further debt payments); (iii) certain
proceeds from any additional asset sales the Company may undertake
will be used to reduce the principal balance on the gold loan; and
(iv) the $2.5 million remaining from the May, 1998 hedge liquidation
was utilized for scheduled debt service for the period ending
September 30, 1998 (644 ounces of principal and 312 ounces of
interest) and to further reduce the principal on the gold loan by
8,225 ounces. As a result of the partial prepayment of the gold loan,
the Company recognized a gain of $919,700 (8,869 ounces of principal
repaid by open market purchase at $284.35 per ounce; corresponding
reduction in debt at $388.05 per ounce). This amount is shown as an
other income item on the Statement of Operations for the year ended
December 31, 1998.
The following table summarizes principal and interest payments and
weighted average interest rates on the loan facility:
1998 1997 1996
---------- ---------- ----------
Principal payments
Gold loan
o Ounces 13,057 4,832 --
o Monetized amount $5,066,700 $1,875,000 --
Cash loans $8,700,000 $ 300,000 --
Interest payments
Gold loan
o Ounces 2,481 2,437 2,661
o Market value $ 730,700 $ 787,800 $1,023,300
Cash loans $ 390,900 $ 767,000 $ 364,200
Weighted average interest rates
Gold loan 3.5% 3.4% 4.1%
Cash loans 10.3% 10.2% 9.9%
========== ========== ==========
58
61
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. NOTES PAYABLE, (CONTINUED):
The Company's debt at December 31, 1998, consists of a gold loan in
the amount of $18,058,400 (46,536 ounces monetized at $388.05 per ounce) and a
dollar based credit line with $650,000 outstanding. The Company has reserved
$2,400,000 from the sale of its industrial minerals assets to i) pay off the
credit line amount of $650,000 and ii) pay-down $1,750,000 of the gold loan in
1999. In January 1999, the credit line amount of $650,000 was paid off. In
February 1999, $1.0 million was used to purchase 3,451 ounces of gold at a
market price of $289.75 per ounce which was applied to the gold loan. In April
1999, the remaining $750,000 was used to purchase 2,666 ounces of gold at a
market price of $281.30 per ounce which was applied to the gold loan.
Absent the lenders calling the loan, repayment terms generally require
quarterly installments which include scheduled principal reductions and a
varying cash sweep amount equal to 30% of free cash flow (as defined) after
primary debt service. After funding certain reserve accounts (as defined), if
necessary, remaining cash flow is available to the Company, subject to further
restrictive conditions. These restrictions include assertions of no potential
or actual defaults at the time of transfer and to the frequency of such
transfers.
As a condition of the loan, a portion of the Briggs Mine's future
production is hedged to ensure adequate cash flow for repayment of the
obligation. At December 31, 1998, approximately 46% of the Briggs Mine
production from current reserves was hedged as follows:
AVERAGE
OUNCES PRICE/OZ.
------- --------
Forward Contracts (1) 183,800 $ 307
Gold Loan 46,536 $ 388
-------
230,336 $ 323
======= ========
(1) Short dated contracts of 30 days or less to take advantage of
higher near-term forward rates. Contracts not settled by delivery
of gold ounces will be rolled out at one-month intervals,
increasing the realized price by approximately $1.00 per month at
current annualized rates of approximately 4%.
(b) In October, 1997, the Company's wholly-owned subsidiary, CR Minerals
Corporation (CR Minerals), obtained a one-year revolving credit line
(Revolver) with Norwest Bank Colorado, N.A. in an amount not to exceed
the lesser of a borrowing base or $600,000. The borrowing base is
calculated on 70% of CR Minerals' domestic accounts receivables not
more than 90 days in age from date of invoice. The average interest
rate in 1998 was 9.0% and interest payments of $26,300 were made. In
1997, the average interest rate was 9% and interest payments of $1,500
were made. The Revolver was fully paid down and closed during the
fourth quarter of 1998.
59
62
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. NOTES PAYABLE, (CONTINUED):
(c) On December 31, 1997, CR Minerals purchased the pumice mine which
supplied the raw ore for its New Mexico processing facility from
Western Mobile Santa Fe, Inc. Total purchase price was $950,000, of
which $475,000 was paid at closing with the balance of $475,000 paid
on December 29, 1998. As the promissory note issued for the remaining
consideration did not contain a stated interest rate, an imputed rate
of 9% was used to establish the note's present value, resulting in a
discount of $40,700.
This amount was amortized to interest expense during 1998.
10. SITE RESTORATION COSTS:
Reclamation spending at the Kendall Mine for 1998, 1997, and 1996,
respectively, was $1,096,100, $1,752,000 and $1,105,800, respectively. Costs to
date total $5.4 million and the Company's estimate of total costs to achieve
mine closure is $8.2 million.
The Kendall Mine operates under permits granted by the Montana
Department of Environmental Quality (DEQ). The DEQ requires the Company to
maintain a $1,869,000 Reclamation Bond to ensure appropriate reclamation. The
DEQ is currently reviewing the adequacy of the bond amount and the Company
anticipates that the DEQ will require a bond increase, but cannot presently
predict the amount of any such increase. Additionally, although the DEQ has
approved the Company's plans related to recontouring, revegetation, drainage
and dewatering, discussions of long-term water handling and heap closure
methods continue. The Company's estimate to achieve final mine closure may be
impacted by the outcome of these pending matters.
The Briggs Mine operates under permits granted by various agencies
including the U.S. Bureau of Land Management (BLM), Inyo County, the California
Department of Conservation, and the Lahontan Regional Water Quality Control
Board (Lahontan). These agencies have jointly required the Company to post a
reclamation bond in the amount of $3,030,000 to ensure appropriate reclamation.
Additionally, the Company was required by Lahontan to post a $1,010,000 bond to
ensure adequate funds to mitigate any "foreseeable release" of pollutants to
state waters. Both bonds are subject to annual review and adjustment.
11. LEASE COMMITMENTS:
The Company has entered into various operating leases for office space
and equipment, including a mining fleet at the Briggs Mine. At December 31,
1998, future minimum lease payments extending beyond one year under
noncancellable leases were as follows:
1999 2000 2001 2002 2003 Thereafter Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
$1,913,300 $1,910,700 $ 212,200 -- -- -- $4,036,200
The Company has also entered into various mining lease arrangements
for purposes of exploring, and if warranted, developing and producing minerals
from the underlying leasehold interests. The lease arrangements typically
require advance royalty payments during the pre-production phase and a
production royalty upon commencement of production, with previously advanced
payments credited against the production
60
63
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. LEASE COMMITMENTS, (CONTINUED):
royalties otherwise payable. Advance royalty commitments will vary each year as
the Company adds or deletes properties. Currently, minimum advance royalty
payments total approximately $162,100 annually.
The Company is also required to pay an annual rental fee to the
federal government for any unpatented mining claims, mill or tunnel site claim
on federally owned lands at the rate of $100 per mining claim. The Company's
present inventory of claims would require approximately $91,400 in annual
rental fees, however, this amount will vary as claims are added or dropped. The
Company has submitted patent applications for its Briggs claims, however, no
assurances can be made that patents will be issued. The Company is also subject
to rental fees to various other owners or lessors of mining claims. Currently,
rental payments to these parties total approximately $17,900 annually.
Lease costs included in cost of goods sold for the years ended
December 31, 1998, 1997 and 1996 were $2,307,100; $2,072,300; and $19,500,
respectively. The aforementioned amounts do not include lease costs capitalized
during the development stage of the Briggs Mine during part of 1997 and all of
1996. Rent expense included in selling, general and administrative expense of
the Company for the years ended December 31, 1998, 1997 and 1996, was $120,300;
$120,300; and $100,900, respectively.
Property and equipment includes equipment with a cost and accumulated
amortization of $1,956,900 and $487,100, respectively, at December 31, 1998 and
$647,400 and $236,200, respectively, at December 31, 1997, for leases that have
been capitalized. Future minimum lease obligations under capital leases are as
follows:
1999 $ 497,400
2000 338,000
2001 312,600
2002 272,000
2003 379,600
-------------
Total 1,799,600
Less amounts representing interest 329,600
-------------
Present value of minimum lease payments 1,470,000
Less current obligations 378,300
-------------
Long-term obligations under capital lease $ 1,091,700
=============
12. CONTINGENT LIABILITY:
On September 25, 1997, the Company, together with its wholly owned
subsidiary, CR Montana Corporation (CR Montana), purchased a 72.25%
participating interest and underlying assets in the Seven-Up Pete Venture
(Venture) from CR Montana's partner in the Venture, Phelps Dodge Corporation
(Phelps Dodge). The Company and its wholly owned subsidiary now own 100% of the
Venture. The Venture includes the McDonald Gold Project near Lincoln, Montana.
61
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CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. CONTINGENT LIABILITY, (CONTINUED):
The Company made an initial payment of $5 million as part of a total
purchase price which will be no less than $100 million and no more than $150
million, assuming all applicable permits for the McDonald Gold Project are
obtained. The largest part of the purchase price, $30 per mineable reserve
ounce attributable to the Phelps Dodge ownership is to be paid after all
permits for mine development are obtained. Due to the contingent nature of the
transaction, the Company has recorded only the initial payment of $5 million as
additions to mining claims and leases during 1997.
13. OTHER CONTINGENT MATTERS:
On September 24, 1998, the Montana Department of Natural Resources
(DNRC), the entity that administers state mineral leases, unilaterally decided
to cancel the permitting extension of the 10-year lease term of the state
leases that pertain to the McDonald Gold Project. This was provoked by Canyon's
inability to continue permitting at McDonald due to the anti-cyanide
initiative, I-137, and would require the Company, after a period of
approximately seventeen months, to commence paying a delay rental of $150,000
per month in order to maintain the leases. The Company has challenged the
DNRC's action in Montana District Court and believes it will prevail in this
matter.
In September, 1998, the Montana Department of Environmental Quality
(DEQ) filed a complaint in District Court alleging violations of the Montana
Water Quality Act for unpermitted discharges at the Kendall Mine. The DEQ
initially proposed a civil penalty in the amount of $330,000, which was
subsequently modified to $302,000, in connection with the complaint. The
Company is currently preparing a response to the complaint and believes the
penalty as currently assessed is without substantial merit.
In November 1998, the Montana electorate passed an anti-cyanide mining
initiative (I-137) by a vote of 52% to 48%. I-137 bans development of new gold
and silver mines and expansions to existing mines which use cyanide in the
treatment and recovery process. For most of the campaign period, mining
companies were prevented from campaigning due to a previously passed initiative
(I-125) which prohibited campaign-expenditures by "for-profit" entities. Ten
days prior to the election, a federal judge declared the prohibition
"unconstitutional". The mining community has filed lawsuits against I-137,
based on (i) having been denied the opportunity to campaign due to the
effectiveness of I-125 until the last few days, and (ii) due process
considerations, in that I-137 results in a taking of property without any
compelling public policy interest, since environmental safety concerns are well
protected and monitored with existing laws and regulations. The Company's legal
counsel believes that it is likely that I-137 will be declared
unconstitutional, or at a minimum, be overturned.
In March 1999, the Company received a demand notice for an increase in
collateral of approximately $1.2 million from the Surety who issued certain
bonds for reclamation obligations at the Briggs Mine, KendallMine and McDonald
Gold Project. The Company is not presently able to honor the demand due to its
financial position and is unsure what remedies, if any, the Surety may seek for
resolution on the matter.
62
65
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. CERTAIN CONCENTRATIONS AND CONCENTRATIONS OF CREDIT RISK:
The Company sold its gold and silver production predominantly to two
customers during 1998 and 1997 and to one customer during 1996. Given the
nature of the commodities being sold and because many other potential
purchasers of gold and silver exist, it is not believed that loss of such
customers would adversely affect the Company.
The Company is subject to credit risk in connection with its price
protection arrangements as outlined in Note 9(a) in the event of
non-performance by its counterparties. The Company uses only highly-rated
creditworthy counterparties, however, and does not anticipate non-performance.
The Company is subject to concentrations of credit risk in connection
with maintaining its cash primarily in two financial institutions for the
amounts in excess of levels insured by the Federal Deposit Insurance
Corporation. The Company considers the institutions to be financially strong
and does not consider the underlying risk to be significant. To date, these
concentrations of credit risk have not had a significant effect on the
Company's financial position or results of operations.
15. CONTINGENT SALES OF EXPLORATION PROPERTIES:
The Company executed an agreement during the second quarter of 1997 to
sell the Mountain View property in Nevada for $3.0 million, payable over a
twenty-four month period and, until the purchase price is paid in full, an
aggregate work commitment of $1,250,000. At any time, the buyer, upon proper
notice, could terminate the agreement and its then remaining obligations, and
relinquish its interest in the property. Due to the contingent nature of the
transaction, gain was recognized only upon receipt of cash in excess of basis.
During the third quarter of 1998, the buyer relinquished its interest in the
property. The Company subsequently returned the property to the underlying
lessors. No gain or loss occurred as a result of the property relinquishment.
In 1997, the Company recorded a gain of $229,100 in connection with payments
received in the initial year of the agreement.
The Company executed an agreement during the third quarter of 1997 to
sell the Aeropuerto property in Chubut Province, Argentina for $2.0 million,
payable over a sixty month period. At any time, the buyer, upon proper notice,
may terminate the agreement and its then remaining obligations, and relinquish
its interest in the property. Due to the contingent nature of the transaction,
gain will be recognized only upon receipt of cash in excess of basis over the
sixty month period. Accordingly, the Company recorded a gain of $70,100 during
1998 and $42,400 during 1997.
16. DEFERRED INCOME:
In May, 1998, the Company liquidated its gold hedge position for all
forward contracts with settlement dates beyond June 30, 1998, resulting in
proceeds of $11.1 million. For the year ended December 31, 1998, $2.5 million
of the gain has been recognized in operations based on the original terms of
the forward contracts. During 1999, $4.1 million of the gain will be recognized
with the balance of $4.5 million recognized in 2000.
63
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CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. SALE OF INDUSTRIAL MINERALS ASSETS:
On December 31, 1998, the Company completed the sale of its industrial
minerals assets to an investment group for a purchase price of $6,475,000 less
certain working capital adjustments. The purchase price included consideration
of $475,000, which was used to pay the Western Mobile promissory note. (See
Note 9(c). As a result of the sale, the Company recorded a loss on asset
disposals of $849,100.
18. INCOME TAXES:
The Company computes deferred income taxes under the asset and
liability method prescribed by Statement of Financial Accounting Standards No.
109. This method recognizes the tax consequences of temporary differences
between the financial statement amounts and the tax bases of certain assets and
liabilities by applying statutory rates in effect when the temporary
differences are expected to reverse. The Company has significant deferred tax
assets in the form of operating loss carryforwards; however, its ability to
generate future taxable income to realize the benefit of these assets will
depend primarily on bringing new mines into production. As commodity prices,
capital, and environmental uncertainties associated with that growth
requirement are considerable, the Company applies a full valuation allowance to
its deferred tax assets, except to the extent that the benefit of operating
loss carryforwards can be used to offset future reversals of existing deferred
tax liabilities. During 1998, 1997, and 1996, the change in the valuation
allowance was $4,231,400, $1,211,500, and $3,263,100, respectively, and was due
primarily to increased operating loss carryforwards and changes in temporary
differences.
Deferred tax assets and liabilities were comprised of the following at
December 31, 1998, and December 31, 1997:
December 31, 1998 December 31, 1997
----------------- -----------------
DEFERRED TAX ASSETS
Reserve for mine reclamation $ 1,540,900 $ 1,762,500
Inventories 1,680,400 2,291,900
Net Operating Loss Carryforwards 20,759,700 18,449,400
Other 1,414,800 374,300
----------- -----------
Total Gross Deferred Tax Assets 25,395,800 22,878,100
Valuation Allowance (21,266,600) (17,035,200)
----------- -----------
Net Deferred Tax Assets $ 4,129,200 $ 5,842,900
----------- -----------
DEFERRED TAX LIABILITIES
Net PP&E (writedowns, depreciation/depletion
and exploration/development expenditures) $(3,019,500) $(5,256,300)
Deferred Stripping (1,109,700) (536,700)
Other -- (49,900)
----------- -----------
NET DEFERRED INCOME TAX ASSET (LIABILITY) $(4,129,200) $(5,842,900)
----------- -----------
$ -- $ --
=========== ===========
64
67
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. INCOME TAXES, (CONTINUED):
There was no current or deferred provision for income taxes for the
years ended December 31, 1998, 1997, and 1996. The current provision for income
taxes differs from the amounts computed by applying the U.S. federal statutory
rate as follows:
1998 1997 1996
----------- ----------- -----------
Tax at Statutory Rate of 34% $(4,100,000) $(1,707,600) $(2,419,100)
Net Operating Loss Without Tax Benefit 4,100,000 1,707,600 2,419,100
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
At December 31, 1998, the Company had net operating loss carryforwards
for regular tax purposes of approximately $56,703,200 and approximately
$41,973,800 of net loss carryforwards available for the alternative minimum
tax. The net loss carryforwards will expire from 1999 through 2017.
As a result of a merger in 1987, net operating loss carryforwards at
the merger date were limited by Section 382 of the Internal Revenue Tax Code to
approximately $112,800 annually. Of the total net loss carryforwards available
at December 31, 1998, $913,300 remains subject to Section 382 limitations.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company does not acquire, hold or issue financial instruments for
trading purposes. The estimated fair values of the Company's financial
instruments at December 31, 1998, and December 31, 1997, are as follows:
AT DECEMBER 31 1998 1997
- ------------------------- ------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Cash and Cash Equivalents $1,985,700 $1,985,700 $3,111,000 $3,111,100
Restricted Cash $4,887,200 $4,887,200 $2,316,300 $2,316,300
Long-term Investments $ -- $ -- $ 309,700 $ 429,000
Long-term Debt (1) $ -- $ -- $8,180,000 $8,180,000
========== ========== ========== ==========
(1) Long-term debt excludes the carrying and fair value amounts for the
Company's gold loan (see Note 9(a)) because the commodity based loan
does not meet the criteria established for inclusion as a financial
instrument.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
CASH AND CASH EQUIVALENTS: Carrying amounts approximate fair value based on the
short-term maturity of those instruments.
65
68
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. FAIR VALUE OF FINANCIAL INSTRUMENTS, (CONTINUED):
RESTRICTED CASH: Carrying amounts approximate fair value based on the
short-term maturity of those instruments.
LONG-TERM INVESTMENTS: Fair value estimate based on expected discounted cash
flows at a discount rate commensurate with the risk and contingent nature of
future payments.
LONG-TERM DEBT: Fair value estimate based on discounted cash flows using the
Company's current rate of borrowing for a similar liability.
20. STOCK OPTIONS:
The Company adopted an Incentive Stock Option Plan on April 12, 1982, as
amended (the Plan), whereby options to purchase shares of the Company's common
stock may be granted to employees of the Company, including those who are also
directors of the Company, or subsidiary corporations in which the Company owns
greater than a 50% interest. Exercise price for the options is at least equal
to 100% of the market price of the Company's common stock at the date of grant
for employees who own 10% or less of the total voting stock of the Company; and
110% of the market price of the Company's common stock at the date of grant for
employees who own more than 10% of the Company's voting stock. Options become
exercisable after the second anniversary of the date of the grant and can
expire up to 10 years from the date of the grant.
Incentive stock option activity during 1998, 1997, and 1996 was as
follows:
1998 1997 1996
--------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
Amount Average Price Amount Average Price Amount Average Price
--------- ------------- --------- ------------- --------- -------------
Outstanding,
beginning of year 2,191,200 $ 2.25 2,005,000 $ 2.50 1,965,200 $ 2.36
Granted 486,000 $ 0.25 511,000 $ 1.33 348,500 $ 2.57
Exercised -- -- (113,400) $ 1.66 (186,400) $ 1.33
Forfeited (307,700) $ 2.47 (211,400) $ 2.66 (122,600) $ 2.27
Expired (226,500) $ 3.69 -- -- -- --
--------- --------- ---------
Outstanding,
end of year 2,143,700 $ 1.62 2,191,200 $ 2.25 2,005,000 $ 2.50
========= ========= =========
Exercisable,
end of year 1,184,200 $ 2.29 1,333,200 $ 2.51 1,104,000 $ 2.62
========= ====== ========= ====== ========= ======
66
69
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. STOCK OPTIONS, (CONTINUED):
A summary of the outstanding incentive stock options as of December 31,
1998, follows:
Range of Amount Weighted Average Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- --------------
Less than $ 1.00 486,000 4.9 years $ 0.25
$ 1.00 - $ 1.99 724,200 3.0 years $ 1.37
$ 2.00 - $ 2.99 649,500 2.3 years $ 2.31
$ 3.00 or more 284,000 2.6 years $ 3.00
At December 31, 1998 there were 1,421,486 shares reserved for future
issuance under the Plan.
On March 20, 1989, the Company's Board of Directors approved the
adoption of a Non-Qualified Stock Option Plan (the Non-Qualified Plan). Under
the Non-Qualified Plan, the Board of Directors may award stock options to
consultants, directors and key employees of the Company, and its subsidiaries
and affiliates, who are responsible for the Company's growth and profitability.
The Non-Qualified Plan does not provide criteria for determining the number of
options an individual shall be awarded, or the term of such options, but
confers broad discretion on the Board of Directors to make these decisions.
Total options granted under the Non-Qualified Plan may not have a term longer
than 10 years or an exercise price less than 50 percent of the fair market
value of the Company's common stock at the time the option is granted.
By vote of the Company's shareholders at the May 17, 1995, Annual
Shareholders Meeting, the Company adopted a motion to award each non-employee
Director options to purchase 10,000 shares of common stock each year during
their tenure on the Board of Directors. Such stock option awards from the
Non-Qualified Plan are made at an exercise price equal to the closing price of
the Company's common stock one day prior to the Annual Shareholders Meeting.
The non-employee Director grants are exercisable at any time between one and
five years from the date of grant.
67
70
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. STOCK OPTIONS, (CONTINUED):
Non-qualified stock option activity during 1998, 1997, and 1996 was as
follows:
1998 1997 1996
--------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
Amount Average Price Amount Average Price Amount Average Price
--------- ------------- --------- ------------- --------- -------------
Outstanding,
beginning of year 320,000 $ 2.88 260,000 $ 2.54 335,000 $ 2.21
Granted 40,000 $ 0.81 140,000 $ 3.00 60,000 $ 3.31
Exercised -- -- (40,000) $ 2.39 (120,000) $ 1.41
Forfeitures (150,000) $ 2.67 (40,000) $ 2.72 (15,000) $ 3.69
Expirations (60,000) $ 3.19 -- -- -- --
-------- ------- --------
Outstanding,
end of year 150,000 $ 2.42 320,000 $ 2.88 260,000 $ 2.72
======== ======= ========
Exercisable,
end of year 120,000 $ 2.83 180,000 $ 2.80 200,000 $ 2.54
======== ====== ======= ====== ======== ======
A summary of the outstanding non-qualified stock options as of December
31, 1998, follows:
Range of Amount Weighted Average Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- --------------
Less than $ 1.00 30,000 4.4 years $ 0.81
$ 1.00 - $ 1.99 -- -- --
$ 2.00 - $ 2.99 30,000 1.1 years $ 2.10
$ 3.00 or more 90,000 3.2 years $ 3.07
At December 31, 1998, there were 298,357 shares reserved for future
issuance under the Non-Qualified Plan.
The Company measures compensation cost as prescribed by APB Opinion No.
25 (APB 25), Accounting for Stock Issued to Employees. No compensation cost has
been recognized in the financial statements as the exercise price of all option
grants is at least equal to 100% of the market price of the Company's common
stock at the date of grant. In October 1995, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 123 (SFAS
123), Accounting For Stock-Based Compensation, effective for fiscal years
beginning after December 15, 1995. SFAS 123 defines a "fair
68
71
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. STOCK OPTIONS, (CONTINUED):
value" based method of accounting for employee options or similar equity
instruments. Had compensation cost been determined under the provisions of SFAS
123, the following pro forma net loss and per share amounts would have been
recorded:
1998 1997 1996
----------- ----------- -----------
Net loss
o As reported $12,058,900 $ 5,022,300 $ 7,114,900
o Pro Forma $12,339,800 $ 5,506,300 $ 7,401,800
Basic and diluted loss per share
o As reported $ 0.26 $ 0.13 $ 0.21
o Pro Forma $ 0.27 $ 0.14 $ 0.22
The weighted average fair value for options granted in 1998, 1997 and
1996 was $0.14 per share, $0.72 per share, and $1.02 per share, respectively.
The pro forma amounts were determined using the Black Scholes model with the
following assumptions:
1998 1997 1996
---- ---- ----
Expected volatility
o Incentive Stock Options 91.0% 75.2% 73.7%
o Non-Qualified Stock Options 79.3% 80.3% 73.7%
Expected option term
o Incentive Stock Options 3 years 3 years 3 years
o Non-Qualified Stock Options 5 years 5 years 5 years
Weighted average risk-free interest rate
o Incentive Stock Options 4.5% 5.8% 5.8%
o Non-Qualified Stock Options 5.6% 6.5% 6.6%
Forfeiture rate
o Incentive Stock Options 15% 15% 15%
o Non-Qualified Stock Options - - -
21. WARRANTS:
As a result of an equity offering in June 1997, warrants to purchase
278,182 shares of $0.01 par value common stock were issued at a price of $4.05
per share. The warrants will expire on June 5, 2000.
69
72
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
21. WARRANTS, (CONTINUED):
As a result of a private placement in March 1996, warrants to purchase
2,017,167 shares of $0.01 par value common stock were sold. For each share of
the Company's common stock purchased, the purchaser received one-half warrant.
Each whole warrant entitled the holder to purchase one share of common stock at
an exercise price equal to $3.75 per share. A warrant to purchase 300,000
shares of common stock was issued to the Company's underwriter and financial
advisor in connection with the private placement at the same terms and
conditions. A warrant to purchase 15,000 shares of common stock was exercised
in March 1999 and the remaining warrants to purchase 2,302,167 shares of common
stock expired on March 25, 1999.
22. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS:
The provisions of Statement of Financial Accounting Standards No. 131
(SFAS 131), Disclosures about Segments of an Enterprise and Related
Information, became effective for fiscal years beginning after December 15,
1997. SFAS 131 establishes standards for the way that public business
enterprises determine operating segments and report information about those
segments in annual financial statements. SFAS 131 also requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 further establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company does not presently have separate
operating segments which would require the disclosures prescribed by SFAS 131.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999 and establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that the Company recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. At this time, the Company has not determined the
effects, if any, that adopting SFAS 133 will have on its financial condition,
liquidity or results of operations.
70
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There has been no change in the Company's certified public accountants
during the past two years. There has been no report on Form 8-K of a
disagreement between the Company and its accountants on any matter of accounting
principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears in the Company's Proxy
Statement for the 1999 Annual Meeting to be filed within 120 days after the end
of the fiscal year and is incorporated by reference in this Annual Report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the Company's Proxy
Statement for the 1999 Annual Meeting to be filed within 120 days after the end
of the fiscal year and is incorporated by reference in this Annual Report on
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item appears in the Company's Proxy
Statement for the 1999 Annual Meeting to be filed within 120 days after the end
of the fiscal year and is incorporated by reference in this Annual Report on
Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Company's Proxy
Statement for the 1999 Annual Meeting to be filed within 120 days after the end
of the fiscal year and is incorporated by reference in this Annual Report on
Form 10-K.
71
74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Financial Statements (included in Part II of this Report):
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations - Years ended
December 31, 1998, 1997, and 1996
Consolidated Statement of Changes in Stockholders' Equity -
Years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years ended December
31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
(b) There were no reports filed on Form 8-K during the last quarter of the
period covered by this report.
(c) Exhibits, as required by Item 601 of Regulation S-K, are listed on
pages 73 to 74. The exhibit numbers correspond to the numbers assigned
in Item 601 of Regulation S-K.
72
75
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of the Company, as amended (2)
3.1.1 Executed Certificate of Designations, dated December 26, 1990,
as filed with the Delaware Secretary of State on December 26,
1990 (3)
3.2 Bylaws of the Company, as amended (8)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Warrant Certificate (5)
4.3 Warrant Agreement dated March 20, 1996, by and between the Company
and American Securities Transfer, Inc. (5)
4.4 Rights Agreement dated March 20, 1997, between Canyon Resources
Corporation and American Securities Transfer & Trust, Inc. (6)
10.1 Change of Control Agreements, dated December 6, 1991, between the
Company and Richard H. De Voto, Gary C. Huber and William W. Walker
(4)
10.2 Loan Agreement dated December 6, 1995, among CR Briggs Corporation
as Borrower and Banque Paribas as Agent (5)
10.2.1* Amendment No. 1 to Loan and Guarantee Agreements dated April 8,
1998, among CR Briggs Corporation, Canyon Resources Corporation, and
Banque Paribas as Agent
10.2.2* Amendment No. 2 to Loan and Guarantee Agreements dated August 19,
1998, among CR Briggs Corporation, Canyon Resources Corporation, and
Banque Paribas as Agent
10.3 Master Tax Lease dated December 27, 1995, between CR Briggs
Corporation and Caterpillar Financial Services Corporation (5)
10.4 Purchase Agreement dated September 25, 1997, between Phelps Dodge
Corporation, acting through its division, Phelps Dodge Mining
Company, and CR Montana Corporation and Canyon Resources Corporation
(7)
21.1* Subsidiaries of the Registrant
23.1* Consent of PricewaterhouseCoopers LLP
23.2* Consent of Kvaerner Metals (formerly Davy International)
27* Financial Data Schedule
* Filed herewith
73
76
(1) Exhibit 4.1 is incorporated by reference from the Company's
Registration Statement on Form 8-A as declared effective by the
Securities and Exchange Commission on March 18, 1986.
(2) Exhibit 3.1 is incorporated by reference from Exhibit 3.1 to the
Company's Registration Statement on Form S-3 (File No. 333-00175)
declared effective by the Securities and Exchange Commission on May 14,
1996.
(3) Exhibit 3.1.1 is incorporated by reference from Exhibit 4 of the
Company's Report on Form 8-K filed with the Securities and Exchange
Commission on December 26, 1990.
(4) Exhibit 10.1 is incorporated by reference from Exhibit 10.20 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.
(5) Exhibits 4.2, 4.3, 10.2 and 10.3 are incorporated by reference from
Exhibits 4.9, 4.10, 10.22 and 10.23 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(6) Exhibit 4.4 is incorporated by reference from Exhibit 4 of the
Company's Report on Form 8-K filed with the Securities and Exchange
Commission on March 27, 1997.
(7) Exhibit 10.4 is incorporated by reference from Exhibit 2 of the
Company's Report on Form 8-K filed with the Securities and Exchange
Commission on October 9, 1997.
(8) Exhibit 3.2 is incorporated by reference from Exhibit 3.2 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
74
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
CANYON RESOURCES CORPORATION
Date: March 31, 1999 /s/ Richard H. De Voto
--------------------------------------------
Richard H. De Voto
Principal Executive Officer
Date: March 31, 1999 /s/ Gary C. Huber
--------------------------------------------
Gary C. Huber
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Date: March 31, 1999 /s/ Richard H. De Voto
--------------------------------------------
Richard H. De Voto, Director
Date: March 31, 1999 /s/ Gary C. Huber
--------------------------------------------
Gary C. Huber, Director
Date: March 31, 1999 /s/ James E. Askew
--------------------------------------------
James E. Askew, Director
Date: March 31, 1999 /s/ Leland O. Erdahl
--------------------------------------------
Leland O. Erdahl, Director
75
78
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of the Company, as amended (2)
3.1.1 Executed Certificate of Designations, dated December 26, 1990,
as filed with the Delaware Secretary of State on December 26,
1990 (3)
3.2 Bylaws of the Company, as amended (8)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Warrant Certificate (5)
4.3 Warrant Agreement dated March 20, 1996, by and between the Company
and American Securities Transfer, Inc. (5)
4.4 Rights Agreement dated March 20, 1997, between Canyon Resources
Corporation and American Securities Transfer & Trust, Inc. (6)
10.1 Change of Control Agreements, dated December 6, 1991, between the
Company and Richard H. De Voto, Gary C. Huber and William W. Walker
(4)
10.2 Loan Agreement dated December 6, 1995, among CR Briggs Corporation
as Borrower and Banque Paribas as Agent (5)
10.2.1* Amendment No. 1 to Loan and Guarantee Agreements dated April 8,
1998, among CR Briggs Corporation, Canyon Resources Corporation, and
Banque Paribas as Agent
10.2.2* Amendment No. 2 to Loan and Guarantee Agreements dated August 19,
1998, among CR Briggs Corporation, Canyon Resources Corporation, and
Banque Paribas as Agent
10.3 Master Tax Lease dated December 27, 1995, between CR Briggs
Corporation and Caterpillar Financial Services Corporation (5)
10.4 Purchase Agreement dated September 25, 1997, between Phelps Dodge
Corporation, acting through its division, Phelps Dodge Mining
Company, and CR Montana Corporation and Canyon Resources Corporation
(7)
21.1* Subsidiaries of the Registrant
23.1* Consent of PricewaterhouseCoopers LLP
23.2* Consent of Kvaerner Metals (formerly Davy International)
27* Financial Data Schedule
* Filed herewith
79
(1) Exhibit 4.1 is incorporated by reference from the Company's
Registration Statement on Form 8-A as declared effective by the
Securities and Exchange Commission on March 18, 1986.
(2) Exhibit 3.1 is incorporated by reference from Exhibit 3.1 to the
Company's Registration Statement on Form S-3 (File No. 333-00175)
declared effective by the Securities and Exchange Commission on May 14,
1996.
(3) Exhibit 3.1.1 is incorporated by reference from Exhibit 4 of the
Company's Report on Form 8-K filed with the Securities and Exchange
Commission on December 26, 1990.
(4) Exhibit 10.1 is incorporated by reference from Exhibit 10.20 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.
(5) Exhibits 4.2, 4.3, 10.2 and 10.3 are incorporated by reference from
Exhibits 4.9, 4.10, 10.22 and 10.23 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(6) Exhibit 4.4 is incorporated by reference from Exhibit 4 of the
Company's Report on Form 8-K filed with the Securities and Exchange
Commission on March 27, 1997.
(7) Exhibit 10.4 is incorporated by reference from Exhibit 2 of the
Company's Report on Form 8-K filed with the Securities and Exchange
Commission on October 9, 1997.
(8) Exhibit 3.2 is incorporated by reference from Exhibit 3.2 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.